Its latest trend analysis report suggests that European equity fund managers are caught between a rock and a hard place as the markets themselves fall across the continent while redemptions rise to their highest levels since the financial crisis bedded down in 2008.
Fund manager conviction
The fact that Europe is struggling is not exactly news, but what is interesting is how equity fund managers are reacting.
Peter Fuller, fund analyst and sector head at S&P Capital IQ Fund research, comments: “Many fund managers agree that the short-term outlook for European equities is extremely uncertain. In the absence of any confident debate, yet alone governmental consensus throughout Europe, portfolio construction has become highly stock-specific.”
The end result is that portfolios are getting more and more concentrated as managers focus on their high conviction ideas.
“Typically, these are companies with the balance-sheet strength to finance growth internally in the absence of bank lending,” says Fuller.
“However, whereas in 2011 it was widely recognised that good companies would overcome poor political governance, managers are now acknowledging that even good companies could be in danger.
Over the past 10 days, as well as European equities tumbling, S&P Capital IQ has shown returns for sterling-based investors are being further slashed by the currency’s strengthening against the euro.
Marcap switching
“Most managers have raised cash from operating levels to between 5% and 10% of total portfolio assets; and even higher where permissible,” Fuller points out. “While styles have been maintained, small-cap managers have continued to add more mid-cap exposure while mainstream funds have added defensive stocks where possible.”
He concludes: “Caught between crashing European equity markets and overpriced defensive stocks, and limited by their mandates, portfolio managers have nowhere left to go.
“The problem is that many of the traditional defensive names have already been bid higher to the benefit of European equity income managers who were already overweight these stocks.”
