Equity managers caught in the euro crisis – S&P Capital IQ

Equity fund managers are stuck with no place left to go as equity markets across Europe fall and redemptions rise to their highest levels since 2008, says S&P Capital IQ in its latest sector trends paper.

Many fund managers agree that the short-term outlook for European equities is extremely uncertain. In the absence of any confident debate, let alone governmental consensus throughout Europe, portfolio construction has become highly stock-specific.

“A key finding from our annual review of the Europe sector is that portfolio concentrations are tighter than we have seen for several years as managers focus on their highest-conviction ideas,” comments Peter Fuller, fund analyst and sector head at S&P Capital IQ Fund research.

“Typically, these are companies with the balance-sheet strength to finance growth internally in the absence of bank lending. However, whereas in 2011 it was widely recognised that good companies would overcome poor political governance, managers are now acknowledging that even good companies could be in danger.”

A look at S&P Capital IQ graded portfolios over the last two weeks shows that managers face impossible choices all round. Returns for sterling-based investors are being further slashed by sterling’s rapid strengthening against the euro as European markets fall. Most managers have raised cash from operating levels to between 5% and 10% of total portfolio assets, and even higher where permissible.

While styles have been maintained, small-cap managers have continued to add more mid-cap exposure while mainstream funds have added defensive stocks where possible. As growth in China has slowed, so too have sales of luxury goods and fashionable brands and the likes of Richemont, Burberry, Audi etc (all key export drivers of performance at various times in 2011), are being replaced by more domestic consumer plays.

Caught between crashing European equity markets and overpriced defensive stocks, and limited by their mandates, portfolio managers have nowhere left to go. Says Fuller: “The problem is that many of the traditional defensive names have already been bid higher to the benefit of European equity income managers who were already overweight these stocks.”

The full paper is available free at http://www.getmarketscopeeurope.com/

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