Skip to the content

The trends that are spooking managers

01 November 2014

This Halloween we hear what is putting the frights on managers and industry experts.

By Daniel Lanyon,

Reporter, FE Trustnet

While markets received a treat at end of this week with the news of greater quantitative easing in Japan buoying investor sentiment in the country and around the world, plenty of ‘tricks’ are keeping managers on their toes.

A rally across markets but particularly in the Topix was a welcome relief for investors after almost two months of tumbling stock markets. However, all major indices, apart from the S&P 500, are still down from their respective highs before markets corrected at beginning of September.

Performance of indices since 4 September 2014
ALT_TAG

Source: FE Analytics

Risks, of course, remain from Ebola in West Africa to deflation in Europe. Here, we hear from a host of industry figures about what is keeping them up at night.


Jeremy Lang – the end of Quantitative Easing

The manager of the £233m Ardevora UK Income fund says a lack of underlying improvement in UK companies coupled with a perceived flight to safety into larger cap stocks may catch investors on the back foot over the next few months.

“In the UK there has been a noticeable divergence in performance between large, safe feelings stocks and the rest. The divergent performance of large caps has not been driven by company results. While the environment has clearly got tougher, the biggest change in risk of disappointment has been in large caps. Large cap stocks are disappointing almost as much as the rest of the market," he said.

Lang, who favours mid cap names such Tui Travel, BskyB and Reed Elsevier in his 10 largest holdings, says the perception that ‘blue chip’ names are safer because of their larger size is wrong.

“Large caps are no safer than the rest of the market, but investors are drawn to larger stocks during times of ‘dread’ because they are generally more predictable,” he explained.

“This sense of dread is building, and the source is most likely to be the on/off switch of QE, with an added dose of Ebola. Our sense is investors will feel a lack of control and dread for a while longer. We suspect an opportunity is coming, but investors will not enjoy the next few months.”


Fraser Lundie – a liquidity driven crisis in fixed income


The manager of the Hermes Multi Strategy Credit fund is most worried about the drying up of liquidity in bond markets.

“Credit market liquidity has retreated to 2003 levels – as new regulations have forced investment banks to scale down or close their fixed-income dealing desks, which formed a vital secondary market. With surging inflows, but without a robust secondary market, funds have relied on new issuance to put newly raised capital to work” he said.

He says this has resulted in them becoming forced buyers while losing the ability to invest with conviction and as a consequence funds increasing looking like the market.

“This seems inevitable for the largest funds – due to the sheer volume of capital they have to deploy – but for smaller funds with only about €50m, the lack of conviction is alarming. Broadening the universe – both in terms of geography and security type – can enable greater conviction.”


Stuart Mitchell – valuations in stocks exposed emerging markets


The manager of the SWMC European fund says a multitude of risks make companies earning significant portions of the earnings in emerging markets risky with the market not pricing this in.

“For some time we have felt growth stocks exposed to emerging markets were way overpriced, especially considering the many political and economic challenges facing the emerging world. This is still largely the case,” he said.

“Analysts have been woefully remiss at adjusting earnings forecasts for weaker currencies and slower economic growth. On the flipside, the market has little expectation for continued recovery in domestic European plays. Many domestic European companies are trading at discounts to their American equivalents in excess of 50 per cent.”


Darius McDermott - panic over the eurozone


The managing director of FundCalibre also says a plethora of risks have caused an underlying gloom in investors, which could knock back markets despite a positive case for an improving global economy.

“There has been a lot lately keeping me up at night. From poor economic data to ISIS to an outbreak of Ebola, the world appears to be an uncertain place. All of these concerns have combined to spook markets. These types of fears are bad for markets as they can take the focus away from fundamentals – company earnings, dividend growth etc., which, particularly, in the US have been good this year and helped to drive markets,” he said.

McDermott says his greatest fear is that weaker market sentiment in the eurozone will cause panic by investors.

“To mitigate these concerns I hold an element of my investment portfolio in absolute return funds. Absolute Return funds aim to deliver positive returns, in all market conditions, with low volatility. The funds often use investment tools to try to protect against falling markets.”

McDermott recommends the £9.2bn Newton Real Return and the £181m Premier Defensive Growth funds for investors with similar concerns.

The two funds are have beaten the average return in the IMA Targeted Return sector over the past three years, having returned 11.78 and 13.42 per cent, respectively, compared 10.99 per cent.

Performance of funds and sector over 3yrs

ALT_TAG
Source: FE Analytics


The Newton Real Return and the £181m Premier Defensive Growth funds have ongoing charges figures [OCF] of 1.11 per cent and 1.15 per cent respectively.




Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.