Fitch’s report, Stock Picking in Equity Funds, asserts that half of the top quartile fund managers across Europe between 2005 and 2008 are below the median in the past three years. Past performance is no guide to future returns, anyone?
Most of the equity managers with solid performances between 2001 and 2008, we are told, favoured value-oriented stock picking, whereas since 2007 value stocks have structurally underperformed growth stocks. Given how the top-down macro view has held sway on market movements since the credit crisis, it is no great surprise that genuine stockpickers have struggled.
The key point is that we want them stick to their guns rather than, as Fitch suggests, “adapt” their processes to suit market conditions on a backward-looking basis.
Thankfully, some of the best fund managers in the business have remained resolute. The UK Equity Income sector is a case in point, with the likes of Neil Woodford, Adrian Frost and Adrian Gosden, and Anthony Nutt – all household names – all having underperformed their peer group average over the past three years, according to FE Analytics.
Fitch highlights five critical factors which it says have direct implication for stock picking in post-2007 market conditions: low growth prospects, the sovereign crisis, globalisation, disruptive innovation and mass trading. That’s quite a handful for any active fund manager to deal with, and it doesn’t even take into account the pressure on fund houses coming from renewed investor interest in trackers, given the rise of ETFs and more attention being paid to fund fees.
The growth versus value debate does carry weight though. According to Morningstar, for UK-registered funds, the average global, European, UK and US large-cap fund with a growth bias has outperformed value-driven vehicles consistently over the past three and five years. Most notably, the average US growth fund is up 29% over five years to 2 December, compared with a 2% rise from a US value strategy, while for European equity funds the difference is 13% for growth versus -7% for value.
However, that does not necessarily mean this trend will continue. Over one year (12 months to 2 December) the results are far less conclusive. While Europe has, understandably, struggled, value strategies on a global basis have outperformed relatively (-1.7%) compared to growth (-4.5%).
Of course, negative figures are not going to win over anyone though, more encouragingly, UK value-biased funds are up 1.2% over 12 months versus -3% for growth. The numbers may be diminutive, but bear in mind messrs Woodford, Frost and Gosden and Nutt have all rebounded above their sector average this year.
