The stockpickers’ market is that long sought after thing for fund managers: a world in which shares move independently of one another, rather than being propelled in the same direction by some other force.
The theory is this Brownian motion makes it easier to beat a benchmark, an achievement that has been in short supply in recent years.
So managers are always alive to any suggestion that this environment may be making a comeback. And these suggestions haven’t been hard to find: recently, investment bank analysts have been keen to point out that their gauges now show – for the first time in a while – shares are increasingly being driven by “micro” rather than macro factors.
The catalyst for this shift, according to most of these analysts, was the election of Donald Trump. Tied in with this are improving global growth figures and focus shifting away from monetary policy in the US. There are issues, though, with believing this will lead to a more prosperous period for fund managers.
Take one of the basic tenets of the Trump trade: a shift out of bond proxies into more cyclically sensitive companies. This does not manifest itself as good stocks suddenly outperforming bad. It’s a wholesale sector shift that has produced a binary outcome. A ‘stockpicker’ choosing the very best utilities or pharmaceuticals would have been comfortably outperformed by an investor buying financials in bulk.
Research from Goldman Sachs summed up this dynamic earlier this month. In late 2016, correlations between US sectors fell below those observed between stocks for the first time since at least 2011, according to the investment bank.
These developments are not just confined in the US, as two high-profile UK investors acknowledged last week. Invesco Perpetual’s Mark Barnett describes current markets as “very sector driven…sector influences won’t go away. We might see less correlation [between firms], but it is a difficult one to call.”
Old Mutual Global Investors’ Richard Buxton has highlighted another macro influence for domestic investors, saying the path of the pound is likely to “dictate the stockpicker’s agenda”. Perceptions of a favourable settlement for the UK in its negotiations to exit the EU would help sterling and hurt dollar earners such as the FTSE 100’s mega-cap stocks and vice versa, he suggests.
And what of the reality so far in 2017? Rough figures suggest the number of UK All Companies managers outperforming the FTSE All-Share index stands at 25 per cent – above last year’s nadir of 18 per cent, but hardly anything to shout about and still below 2015’s figure of 29 per cent. Admittedly, a stockpicker’s market is only supposed to make things better for the best managers, not all of them. But there’s enough evidence to suggest even this may prove a stretch.
Dan Jones is editor of Investment Adviser
