Four themes for fund pickers amid 'extraordinary' market conditions

'Interesting' and 'encouraging' aspects of volatility

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Gavin Corr, director – manager selection services at Morningstar, looks at the four key areas fund pickers need to keep an eye on amid recent market volatility
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Equities versus fixed income

Equities have dramatically underperformed fixed income, and in particular government bonds over the last few weeks. 

Investors have rushed into the safe-haven bond markets, chasing yields lower and in some cases down to new lows.  

For many multi-asset managers who have favoured equities over fixed income this has been particularly painful.  

Despite the high valuations and low yields on offer, government bond markets have proved to be a far better place to hide than cash.
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Growth versus value

We had begun to observe a nascent reversal over the last few months of the outperformance of growth versus value up until the end of February.  

This was most notable in the UK market where the post- election "Boris Bounce" resulted in flows of money into the UK, one of the cheapest asset classes, which benefited some of the more value sectors.  

As the market began to wobble on Covid-19 concerns during March we saw growth sectors and stocks globally giving back performance as clients locked in outperformance.  

However, the dramatic sell-off, which was particularly savage in the carbon complex of oil stocks and metals and mining, has seen a complete reversal of that mini-trend, with growth stocks, sectors and managers exposed to those areas once again outperforming strongly in the last week, and year to date.

Value managers who had been waiting for a reversal in markets and momentum have been disappointed as this sell-off has actually been harmful to many of those managers.

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Active outperforms passive

One interesting and encouraging aspect of the volatility over the last two weeks has been the outperformance of many active managers.

On 9 March alone, in across UK Large cap funds roughly 80% of active managers outperformed their passive counterparts.

This figure was somewhat replicated in the US in the two weeks ending 9 March, albeit with only around half of active managers outperforming. 

A structural underweight to duration has proven challenging for many managers in the fixed income space. 

However, high yield managers have done a good job of outperforming their respective indexes.
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ESG

Interestingly these dramatic market moves also favoured sustainability and ESG as winning themes.

The lack of exposure to the oil and materials sectors has been very beneficial to the relative outperformance of these strategies given how badly those cyclical sectors have performed.  

Many of the areas of the market that are beneficiaries of the sustainability shift are characterised by growth factors, and also have strong momentum in terms of medium-term share price performance.  

Despite this outperformance and arguably lofty valuations they have extended that relative performance over this period, in some cases dramatically.   

A number of ESG funds sit in the top quartile of performers over the past two weeks with all of the Royal London Sustainable range in the UK performing better than at least 94% of peers. 

At index level, depending on which index is selected, on 9 March the ESG indexes outperformed the FTSE 100 by 50bps-90bps.
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Gavin Corr, director - manager selection services at Morningstar, looks at the four key areas fund pickers need to keep an eye on amid recent market volatility.

February, and in particular March, have proven to be extraordinary months with some of the most volatile movements we have seen since the height of the Global Financial Crisis in 2008. 

Markets have been roiled by the rapid escalation and globalisation of Covid-19 which has begun to have a dramatic and tangibly negative impact on the global economy, with evidence of slowing growth everywhere.

What was initially thought to be a supply side event that was disrupting global trade emanating from the Chinese manufacturing hub, is now turning out to be a demand shock as the consumer and corporates grind to a consumption halt.

Governments across the world are effectively putting their domestic economies into an "economic coma" until the spread can be slowed or halted, and then they can hopefully be rebooted.

This is an unparalleled situation where governments, central banks and Investors are dealing with many unknowns and uncertainties, and with little precedent to leverage off.

As investors grapple with what to do next, the performance of fund managers trying to traverse this volatility, and especially active managers has been interesting to observe.

The most notable features that we have seen over the past few weeks can be summarised under four main headings shown in the gallery above.

 

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