The company found that only half of the top quartile European equity fund managers from the five years before the Global Financial Crisis (GFP) had achieved above median performance in the past three years.
"Most of the equity managers with solid performances between 2001 and 2008 had favoured value-orientated stock-picking. Since 2007, values stocks are structurally underperforming growth stocks," said Aymeric Poizot, managing director in Fitch’s fund and asset manager rating group.
Subsequently, these managers should adapt their processes to new market norms in order to avoid value traps pulling down their performance.
Fitch said in post-2007 market conditions five factors had critical impact on stock picking: low growth prospects, the sovereign crisis, globalisation, disruptive innovation and mass trading.
It added that investment processes such as Growth at Reasonable Price (Garp) and value need to be reinvented.
"Garp buys cheap growth, but growth is becoming scarce, while value managers are threatened by ‘value traps’, stocks stuck at a discounted price," Fitch explained.
To avoid underperformance, Fitch thinks equity managers will have to manage increasingly top down, update their stock selection criteria, or think beyond blue chip indices.
Using techniques like thematic, sector and country analysis, or macro-overlays and hedging is more important in the new norm and should limit downside in stressed periods where correlation neutralises the benefit of stock picking, Fitch concluded.
