8 FEB, 2022
By Constanza Ramos
The work carried out by fund selectors is not easy one, and for this reason, the Sharing Alpha platform has drawn up a list with the best European fund selectors of 2021. The fund selectors who made this 2021 list are: Daniel Rock (Europeiska Investeringsrådgivarna), Guy Schochet (Toledo Capital AG), Austen Robilliard (Murdoch Asset Management), Noel Craven (Quartet Investment Managers), Arnaud Heymann (Edmond de Rothschild), Francisco Falcão (Hawkclaw Capital Advisors), Marie-Christine Lambin (Bolero Capital Sàrl), Rolf Krekeler (Attrax Financial Services S.A.), Rolf Nelson (Principal Portfolio Manager), Brendan McLean (Spence & Partners), Shane Bennett (Cathedral Financial Management), Martin Stolker (ABN AMRO Advisors).
Below you can see the names of the fund selectors who made this 2021 list:
We asked members of the top European fund selectors ranking what their market outlook was for the next twelve months.
At Toledo Capital, We believe that 2022 will remain a challenging year with the easy money behind us and harder for asset managers to generate Alpha. There is a broad consensus of an expected US interest rate hikes and possible quantitative tightening and it is unlikely that the major equity indexes will be able to recreate the high performances of the past two years.
In this backdrop, Therefore, we maintain our view to focus on the right geography and sector/theme selection to achieve an above-average return for our client portfolios.
Our focus this year will be on the following sectors:
A word on Covid
There is a growing belief that Covid may change from a pandemic to endemic disease. However, this is dependent on the assumption that we don’t get another variant that eludes the immune response. Furthermore, while Omicron is treated on the presupposition that its spread is impossible to control in the western world, China and Japan choose a different strategy of closing their borders.
How will that work out?
As we enter 2022, we are implementing our strategy using funds, hedge funds, and ETFs sticking^to our ‘core/satellite’ strategy discipline. In addition to that, we work with AVA Investors to find some smart and innovative structured products that can be used to execute our views.
After a healthy 2021, markets have been in reverse so far this year, with growth assets harder hit than their cheaper counterparts. Whilst it is tempting to look at this short-term data to make predictions about future market patterns, we take a different approach. With so much focus on cost and the growth of passive products, I feel like a dying breed when saying we only select actively managed funds for our portfolios.
Why have I then not been converted to passives? Simply, we believe we can give our clients a better outcome from actively managed funds, but there are pitfalls which passive investors don’t have to contend with.
There are extra risks; the manager can get things wrong – rarely the case with passives. Extra work is needed when analysing an active fund, but most importantly, not succumbing to temptations to sell when things aren’t working. No more is this felt when markets rotate and styles which were in vogue are now hurting relative returns. What should fund selectors do?
Remembering why you’re buying a fund always helps. For us it is about finding managers who can persistently out-perform, then compound this alpha over time. Active funds are alpha plays, with beta risk as standard, not beta plays, so don’t use them as such.
When we’re presented with an adverse market movement, we try to do nothing, if we don’t need to. However, having a portfolio that is designed for this scenario is key and investing in managers who have different styles and processes is our approach. Do we know which region will perform the best or worst this year, or next year? Will the value rally continue or will it be another short-lived event? Honestly, I have no idea, but what I do know is which funds I believe are the best in each area. If value does well, we have value exposure, if growth does well, we have growth exposure etc., but crucially we are still compounding the alpha.
Not all active funds will work at all times, but that doesn’t mean they have stopped serving their purpose.
It is now almost two years since the global pandemic crisis sent the global economy into a standstill. The unprecedented shock led to extraordinary fiscal and monetary support, which helped to trigger a sharp recovery during 2021. Real GDP grew above trend but inflation jumped far more than expected due to supply chain bottlenecks, energy price spikes and labour cost increases.
Although my macroeconomic view is positive for 2022, I believe central banks will adopt a more hawkish stance and governments should start to gradually withdraw some of the emergency support measures. Inflation should normalize around Q2 as base effects dissipate, capex cycle provides support to rebuilding inventories, energy prices stabilize and more people return to the labour market. By that time, monetary policy expectations induced by central banks’ hawkish stance should have played their role through the yield curve dynamic and the futures market. Interest rate increases should penalize growth stocks but favour value stocks. Long duration instruments should be underweighted till UST10Y yield reaches 2.5% while corporate credit should not add significant performance. Trade flows and social living should also normalize by this coming spring as governments alleviate restrictions due to the current Covid-19 situation. Risk allocation should be prudent during the first half of the year, but equity sectors such as financials, industrials, healthcare and consumer staples should still perform well.
European geographies and Japan should be preferred while Asia could somehow witness a rebound from last year’s underperformance. Market volatility will certainly provide opportunities to accumulate on sectors linked to megatrend themes and to benefit from alternative and alpha generating strategies. As data normalizes central banks and governments should retrace from aggressive policies which should be again positive for risk assets in general. In brief, we need additional visibility about the economic consequences of changing the monetary policy stance and inflation dynamics. Higher government spending in infrastructure and digitalization, better corporate balance sheets, higher household savings and supportive monetary policies should provide a tailwind to risk assets.
A turbulent economic backdrop paving the ground for volatile markets. Global economic momentum is easing. Most economists trimmed their global growth outlook on worries of surging inflation, slowing demand, picking coronavirus variants, and the risk interest rates would rise faster than assumed so far raising the odds of a soft landing.
After expanding 5.8% last year, the world economy is expected to slow to 4.3% in 2022, down from 4.5% predicted in October. Global growth is seen slowing further to 3.6% and 3.2% in 2023 and 2024, respectively.
The inflation outlook is making a U-turn. Most economists raised their inflation forecasts for 2022, a dramatic change from just three months ago, when most of them were sharing central bankers’ then-prevalent view that a surge in inflation, driven in part by pandemic-related supply bottlenecks, would be transitory on the view that most of the elements which contributed to higher inflation should fade either due to base effects or higher production. Fears are growing that inflation pressures could remain uncomfortably high. Supply shortages are starting to ease in some places and business inventories are rising again after falling dramatically in 2020 and 2021, but freight costs around the world remain elevated. Labour shortages in the US may be harder to resolve and continue to drive wages higher. Structural forces may also contribute to sustained higher prices. De-globalization and trade wars could make countries step back from the low-cost production model that has prevailed over the last 30 years. The “green revolution” will increase the quality of goods but at a higher cost. Base metals are expected to rise further due to strong demand and limited supply Escalating conflict between Russia and Ukraine could further boost energy prices. The IMF now expect inflation to average 3.9% in advanced economies and 5.9% in emerging markets before subsiding in 2023.
Central bankers are turning more hawkish. In December, the Bank of England was the first major central bank to raise rates since the pandemic started and raised rates again at its February meeting. The Federal Reserve signaled it is likely to raise rates in March and reaffirmed plans to end its bond purchases that month as well before launching a significant reduction in its asset holdings. Philadelphia Fed President said it may be appropriate for the Fed to raise interest rates four times this year, and to move more aggressively if the factors leading to higher inflation are not mitigated. The ECB finally acknowledged mounting inflation risks and even opened the door for an interest rate increase this year, marking a remarkable policy turnaround. While President Lagarde said the ECB would not rush into any move, she declined to repeat her previous guidance that an interest rate increase this year was “very unlikely” suggesting that a rate increase this year should no longer be excluded. Many emerging market central banks, with a few exceptions like Brazil and China, have already embarked in a tightening cycle as emerging economies face a similar challenge.
The earnings cycle is maturing. Profit growth has started to slowfueling the risk of earnings/outlook disappointment. Netflix and Meta were the latest examples of sharp correction in stock prices following quarterly results below expectations. The path to a greener and more sustainable economy will require huge investments to progress towards a carbon neutral economy, which may weigh on corporate profit for some time.
Valuations look elevated with regard to higher inflation and rising yields. Over the past two years, PE above long-term average were justified by low interest rates. In a context of slowing earnings growth and rising interest rates further PE contraction looks inevitable.
In this context, we expect markets to remain volatile with periodical bouts of risk aversion. Central bankers face the difficult task of signaling the end of ultra-accommodative policies at a time when global growth is slowingPolicy mistakes are therefore a main risk. The Fed will need to communication clearly about its policy to prevent a messy correction in financial markets. The pace of monetary policy tightening will be key to equity returns which we expect to be modest this year.
Market Overview: No comment on the markets is complete without mentioning Public Enemy No. 1 – Inflation. Inflation has got everyone talking; from savers who are losing real income, workers losing real wages and investors looking to find ways of beating inflation. Many market participants believe inflation is transitory and will return to normal later this year after reaching multi-decade highs. It is difficult to estimate what will happen to inflation – even central banks get it wrong. Therefore, investors should take a balanced view and not become too focused on one potential path, as well as own real assets which have inflation linked cash flows, e.g. property infrastructure.
Fixed Income: The fixed income market is a problem for investors:
This bad combination makes it a difficult choice to hold fixed income assets.
Despite this, many UK defined benefit pension schemes will increase their allocation to fixed income – why?
Like many institutional investors, asset allocations are driven by liability management. Whilst fixed income does not offer much value, it is the best option for investors looking to de-risk away from equities. Low yields can be increased via the private markets gaining the illiquidity and complexity premium, credit spreads can be managed by strong stock selection, and rising interest rates can be managed by having a low duration. These solutions are by no means perfect, but can help investors.
Equities: What if we have seen peak equities? Many equity markets peaked at the start of the year with global equities down c.6% year to date. Is this the beginning of the end of higher highs for some years to come?
Equities have seen a very strong – almost continual – 13-year period of growth. It seems normal for equities to constantly increase nowadays. But history tells us it can’t last – things do not increase in value forever. There have been times when equities have not performed well and struggled significantly.
One example is when the US benchmark index – the Dow Jones Industrial Average – hit its 1,000 level (a key milestone for investors) in 1972, but soon fell, only to reach that level again in 1982 – 10 years later, a long wait for investors. However, when using the real index price adjusted for inflation it did not rise above 1,000 until 1992, 20 years later. As demonstrated there can be long periods of time with no equity growth although this is often an oversight.
With global equities retuning c.11% p.a for the last 10 years, I feel we may be overdue a period of weak returns. Central banks are reducing stimulus and raising rates as the world recovers from Covid – it is possible that we have seen the last of the highs. Only time will tell.
Global Capital Markets will have a tough time to continue the stellar returns in 2022. A rising inflation alongside interest rate hikes, uncertainties about effects of the Covid-19 variant omicron or geopolitical tension in Europe. The number of scenarios potentially triggering a tail event are tremendous whether in equity markets, bonds or commodities.
At onset of 2022 all these risks seem to materialize with spiking yield curves, wage inflation dragging down equities in general but non-profitable growth stocks in particular. Nevertheless, this unfavorable start to the year I’m highly convinced that history can be taken as playbook and diversification can lead to rewards during challenging times.
Back in 2018 Quantitative Tapering, trade tension between the US & China commingled to a tough December leading to breaking winning streaks across all major benchmarks. Though Multi Asset or Fund of Fund portfolios couldn’t resist in general, a prudent selection was able to limit correlations, losses partially even gained slightly on an annual basis.
This past setup is providing some guidance how to reshape conservative portfolios for lowering the downside risk but also where opportunities may arise once markets are able to digest the further developments and gain certainty about the economic environment.
Short- to Midterm existing and/or additional exposures to liquid alternatives like Long/Short Equity, Relative Value or Merger Arbitrage may provide positive attributions to a long only asset allocation while long-term Growth or Technology continue to offer attractive opportunities, once the dust settles, that shouldn’t be a blind spot to a long-term investor.