In theory, this is a perfect time for stockpickers.
The rising tide of monetary easing after the financial crisis of 2008 lifted all boats. Setting aside even blow-ups as significant as the eurozone debt crisis, the following decade-and-a-bit provided a smooth descent in bond yields and a more than 300 per cent rise in global stocks. Managing money may not have felt easy over that period, but fund managers’ gruelling experience since the start of 2022 means they now look back on it as the best of times.
The upshot — for many fund managers at least — is that the era of relying on broad market shifts (“beta” in investment parlance) to construct a portfolio is over. Now, the discipline is in picking out winners and losers, and investing accordingly for “alpha”.
“Don’t hope for beta, focus on alpha,” said M&G Investments, adding that “the market rewards selection”. The dispersion of returns between global stocks — the spread between winners and losers — is comfortably above the average and median levels of the past 10 years, it said, and even within sectors, it is often above the norm.
Research from Goldman Sachs suggests this tactic is working out nicely. “Alpha opportunities have been improving since last summer, and particularly so in Europe compared to the US,” the bank said in a note this week — a nod to the outsized role of tech stocks in US indices.
So-called long/short hedge funds that take bets on and against companies have been outperforming macro funds that latch on to broader economic trends, Goldman said. Picking the right stocks is becoming more important than picking the right factor to favour, such as growth, value or momentum.
One reason this has all shot up the agenda is that the past year’s rate-rising process has been punchy, to put it mildly. Some companies are going to struggle.
“Interest rates were zero or negative 15 months ago and now they are 5 per cent plus whatever extra it costs for companies or individuals to borrow,” said William Davies, chief investment officer at Columbia Threadneedle Investments.
He added: “Whenever you get a change that quick, you are going to see fallout. We have got to be careful that when you invest . . . companies can keep up with that.” Companies with high levels of debt are particularly at risk.
Investors are looking for dispersion of returns not only within markets but also between them, geographically. Michael Kelly, global head of multi-asset at PineBridge Investments, thinks US stocks, broadly speaking, are just at the start of what will be a long slow period of weakness as monetary support is withdrawn. “The S&P is very overpriced versus the rest of the world,” he said. “We prefer brighter pastures overseas like China and Hong Kong. They are just coming out of recession while we’re going into one. We like to go where things are improving, rather than heading to the edge of a cliff.”
Dispersion, he added, was “never a good word” in the long period when central banks hoovered up bonds to try to prop up inflation. It largely meant downward divergence from the performance of the main US index. But now those central bank bond holdings are being unwound, “it’s coming back”, he said. PineBridge has become more enthusiastic about emerging markets, and more downbeat on the US, than it has been since at least the 2008 crisis.
The problem here is that picking out winning stocks, or bonds, or even sectors, is fraught with the risks of betting on the wrong horse, of excessive concentration and of problematic benchmarking. That is fine for hedge funds, which are paid to find an edge and take a risk, but less so for traditional fund managers trying to conserve other people’s money.
Goldman Sachs may be upbeat on the prospects for stockpickers, but even that optimism comes with a large “but”. The outbreak of stress in the banking sectors of both the US and Europe swiftly reasserted the dominance of macro factors in stock markets, particularly in sectors including banks, insurance, construction and energy, the bank said — a reminder that even the best stockpicker can trip up on shocks.
For some, this is all just too much faff for too little gain. “There’s an argument that stockpicking should work when the market is in turmoil. I don’t think there’s much evidence to support that,” said Mamdouh Medhat, a senior researcher and vice-president at Dimensional Fund Advisors.
Leaning on high-dividend paying stocks, for example, can be appealing to those looking for consistent returns, but the performance of that approach can also be hard to measure, as those companies tend to be robust in times of stress.
Instead, Medhat sticks to his usual strategy: be diversified, don’t try to time the market and trust broad asset prices to shake off shocks.
“Embrace the uncertainty,” he said. “If it’s unsatisfying to think of yourself as a passenger, think ‘I’m a passenger . . . in the most high-tech processing mechanism we’ve ever had. It’s not a horse and buggy, it’s a high-speed luxury train.’” A comfort, perhaps, to those who find it tricky to be picky.
katie.martin@ft.com
