The tide is turning on tactical managers in favour of fundamentals, says GAM’s Anthony Lawler
Anthony Lawler, portfolio manager at GAM, says that hedge fund investors driven by fundamentals could do better than those driven by tactics in the area of European equity.
For European equity long/short hedge funds 2012 was a challenging year.
Shocks to markets – whether from policy, fear or sentiment – proved particularly challenging for fundamental bottom-up managers. Given numerous reversals in market direction and regular bouts of volatility, the environment has been suited to tactical managers with a greater emphasis on top-down analysis.
However, we believe the out-performance of nimble traders over fundamental traders could reverse in the medium to long term, amid a rise in global market stability.
The ECB has taken up the mantle of buyer of last resort for European sovereign bonds, while core Europe seems closer to accepting an open-ended burden sharing of peripheral debt. With the addition of QE3 from the Federal Reserve in the US, the probability of a more stable macro policy backdrop seems to have improved markedly.
For the fundamental investors it is policy framework stability, not growth rates, that matters.
In addition, European equity valuations are attractive. Europe is about as cheap as it has been for thirty years. Many European-listed equities are industry leaders with revenues sourced globally, yet they trade at a steep discount to similar global competitors listed in the US.
The magnitude of recent European equity underperformance is so significant that if a reversal or mean reversion were to happen, it could result in a substantial rally.
The outlook for European equities is also attractive from a technical perspective, with the market relatively under-owned by global investors following outflows in 2012 totalling more than $20 billion, versus only $2.4 billion in outflows for U.S. equities.
While the growth outlook will likely be challenging in Europe for the foreseeable future, hybrid fundamental investors in particular – those fundamentally focused but nimble enough to reposition quickly if eurozone stability weakens materially – could be the winners.
Given attractive valuations and lower policy risk to the sovereign debt crisis, European equities could be less susceptible to political shocks and short-term reversals. The winds are changing and we see this as positive for fundamental European equity hedge managers.