Fitch urges stock-picking fund managers to review process, from the top-down
Practitioners of two of the most popular equity stock picking methods in history must radically reassess and change how they invest, and not just hope a climate favourable to their style will return, says ratings agency Fitch.
“Equity stock-picking is increasingly faced with structural changes stemming from the market conditions that have emerged from the crisis,” says Aymeric Poizot (pictured), managing director in Fitch’s fund and asset manager rating group.
“The argument that a longer time period is needed for a ‘conviction-based’ style to play out is fading away.”
He notes that for three whole years value stocks underperformed growth by about 5% a year, in contrast to most of that decade when value beat growth by between 5% to 10% a year.
Value’s recent underperformance, plus the rising threat of ‘value traps’ – stocks that look cheap, but are cheap with ‘good reason’ – mean value managers should not simply wait for their style to return to favour, Fitch’s report says.
By the same token, Poizot adds, ‘growth at a reasonable price’ (GARP) approaches have also struggled, as growth becomes increasingly scarce.
“In order to succeed in the new environment, many portfolio managers need to change their style.”
The agency notes stock-picking is a “rigid, traditional investment style”, and stock-pickers are “strong characters who are slow to change habits” – but they must change and adapt to the prevailing ‘macro environment’.
“Regardless of whether we are in a ‘new normal’ or just a lengthy bear market, the environment in which stock pickers operate is significantly different from the period between 2001 and 2007,” Poizot says.
Fitch says the environment since the crisis has been “not conducive to equities as an asset class”, and Lipper data shows half of top quartile European equity fund managers between 2005 and 2008 have sat below the peer group median in the last three years.
“Investors are now confronted with a growing number of managers who are now underperforming significantly against peers and reference indexes, after performing well during the last decade.”
To help rectify this, stock pickers should consider adding thematic, sector and country views to their process, to help identify both growth opportunities and value traps.