Bonfire of the shorts starts spreading further afield; European favourites stay in sync
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Short straw
The retail investor has fought back with a vengeance this week: after years of being written off as “buy high, sell low” practitioners, events in the US have emphasised that DIY buyers now have plenty of power themselves.
The Reddit versus Wall Street face-off appears to have been won by the former for now: this morning brought the news that hedge funds had covered most of their Gamestop shorts in light of the runaway share price gains seen this week.
A kernel of logic is buried somewhere underneath the mountain of frantic trading activity seen over recent days. As a hitherto out-of-favour physical retailer, GameStop was the sort of ‘deep value’ play that some adventurous professional investors may have been eyeing themselves in recent weeks. Some Reddit message board users described the stock in exactly these terms, though the point at which the company was good value has clearly long since passed.
In any case, it’s not just the video games retailer that’s been surging of late. Bloomberg notes that pretty much all most-shorted stocks in the US have had a good time of it in recent weeks. A Goldman index comprised of the 50 most-shorted companies in the Russell 3000 is up 33 per cent so far this year, its best-ever month.
These short squeezes - or gamma squeezes, perhaps – are also showing signs of spilling out elsewhere. Some of the biggest shorts in Europe are also seeing shares rise sharply. Commercial real estate firm Unibail is up 16 per cent today, likely due to long/short funds having to cut positions as part of a general retrenchment. As often happens in such situations, there are also signs of profit taking in more reliable names, like ESG stocks.
All this is adding to the sense that exuberant activity is tipping the scales at the moment. The rise of the retail investor may prove a short-term phenomenon, or it may be here for as long as rates are low and real-world entertainment options are limited. But when the FT launches a ‘runaway markets’ series it’s a sure sign that something is up.
Good neighbours?
While events in the US continue to capture most investors’ attention, the knock-on effects in Europe may be of less interest to UK allocators. European equities remain a very small part of UK wealth managers’ portfolios, despite a slight uptick in interest in the second half of last year.
But those who do retain active exposure in the region will be pretty happy with their choices, all told. Of the most popular European equity funds among DFMs, all but one are top quartile over the past year.
BlackRock European Dynamic, Miton European Opps, Man GLG Continental European, and Threadneedle European Select have all comfortably beaten the MSCI Europe ex-UK index over that period – indeed, most have soared past it. The only exception is Crux European Special Situations, which is fourth quartile.
Europe has lagged behind again at the start of 2021: returns are in the black so far this month, but well behind those posted by most other major equity regions. And short-term figures for those funds are a little different: this year, it’s only Crux that has outperformed; the others all trail the sector average.
This is not to say a rotation has taken place – four weeks’ worth of data is hardly enough to make such conclusions. What’s more, there’s little to separate, say, growth and value benchmarks over this period.
In truth, there’s little to separate the performance of all European funds thus far this year: returns have been so muted that it only takes a percentage point or two to bump a fund up or down a quartile. All the same, allocators may well be wary of initial signs like these. After many years of healthy gains, it’s not beyond the realms of possibility that top performers all start to struggle at the same time – and that’s a lesson that might apply both in Europe and other asset classes.
Funds' future
The UK government has published a consultation document on the future of the UK funds industry, now that it’s firmly detached from its continental peers. While some in the retail investment sector are still concerned about prospective changes to EU delegation rules post-Brexit, the call for input does flag some more welcome changes that might be on the cards.
Among those are changes to the taxation of certain funds, the end to restrictions on funds distributing capitals, as well as a focus on whether the UK could become a hub for alternative funds or ETFs. The latter is perhaps less likely, given the first-mover advantage already enjoyed by Ireland and Luxembourg.
Inevitably, the paper does assess the industry from a relatively high level – and knowledge of some specifics is lacking. One question asks whether there are “specific barriers to the use of investment trust companies” as a means of encouraging investment in illiquid assets. Wealth managers running model portfolios on platforms could probably bring some ideas to mind. At the very least, the paper provides an opportunity for those concerns to be voiced.
