Money managers under the microscope
Surfing the sector flows
By Merieme Boutayeb, Research Analyst at Lipper. The views expressed are her own.
A successful asset management strategy requires a thorough reading and consistent analysis of macroeconomic events and cycles for fund managers to identify sources of performance and capture them at the right time via appropriate asset allocation.
An approach which analyzes the performance and flows of different sectors in light of market events and anticipations, is a concrete example that can be undertaken with Lipper data.
There are 20 listed equity sector-based Lipper classifications, which correspond as of the end of February 2011 to a universe of 946 primary funds (2,030 share classes in total) domiciled in Europe and invested worldwide. Analyzing the performance realised and the flows captured or lost by these categories during the last five years provides an insight into trends which have dominated investment thinking.
It is worth noting that the sectors favoured by investors year after year are very volatile and do not necessarily reflect the best performers, with the exception of funds invested in natural resources. Since 2006 these funds have had the best figures among the Lipper categories in terms of inflows (+11.83 million euros for 2006, +19.86 million euros for 2007, +6.013 billion euros for 2009, and +1.815 billion euros for 2010). The only negative year was 2008, when outflows of 4.491 billion euros were recorded in the aftermath of the subprime crisis and on lingering fears of global recession.
During that same year 2008, all equity sector-based Lipper classifications (with one exception) experienced massive outflows – 12.62 billion euros in total – reflecting a widespread feeling of uncertainty. Funds invested in gold and precious metals were the only ones benefiting from the situation; they were used by investors as an investment haven after the crisis and collected 488 million euros for 2008.
But interest in these funds declined severely in 2009 – with outflows of 55 million euros – despite the fact that they recorded the best performance over the year – up nearly 57 percent. Favoured instead were sectors such as natural resources (inflows of 6.013 billion euros), real estate (inflows of 1.113 billion euros), and banking and financial services (inflows of 304 million euros).
Unsurprisingly, the banking sector has been particularly abused since 2007, following the bursting of the subprime bubble with outflows of 1.297 billion euros for 2007 and outflows of 264 million euros for 2008. The trend was reversed in 2009, reflected by inflows of 304 million euros, as investor confidence was rebuilt. This upbeat sentiment faded abruptly in 2010 on the difficulties encountered by some euro zone countries in managing their debt and on mounting fears of an eventual spillover.
It is interesting to note that funds invested in information technology are on the road to recovery in light of encouraging results since 2009. Continual and massive outflows were recorded after the bursting of the tech bubble (still hitting 1.386 billion euros for 2008), but the trend reversed, with 182.5 million euros of inflows for 2009 and 1.080 billion euros of inflows for 2010. This was accompanied by a turnaround in performance; down 43.15 percent for 2008 turned into a gain of 51.78 percent for 2009 and a return of +22.30 percent for 2010.
The pharmaceuticals and healthcare sector is struggling to evolve as a defensive sector as illustrated by the disappointing returns and significant outflows recorded during the last five years. In 2007, for example the health sector was the only so-called defensive sector that did not attract inflows (1.567 billion euros of outflows), compared with the 1.498 billion euros of inflows into utilities funds and the 1.258 billion euros of inflows into funds invested in noncyclical consumer goods and services. Funds invested in real estate posted the strongest outflows – from 6.173 billion euros of inflows for 2006 to 2.313 billion euros of outflows for 2007. The year 2008 was also catastrophic, with more than 3 billion euros of outflows. Since then, real estate funds have managed to claw some of that back with 1.113 billion euros of inflows for 2009 although 2010 saw only 77 million euros of net inflows.
Focusing on last year, the funds invested in cyclical sectors were the most successful. The fear of a global recession had dissipated, thanks to the dynamism of emerging economies, including China. The sectors that topped the rankings were the cyclical goods and services consumers sector (automobile, luxury, household goods), with an positive return of 33.76 percent on average and 1.216 billion euros of inflows. The general industry sector (aerospace, electronic equipment), posted positive returns of 29.50 percent on average and 7.73 million euros of inflows.
Since the beginning of this year, the market has witnessed an important sector rotation, with the acclaimed sectors of the previous year lagging behind. During the first two months of 2011, the cyclical goods and services consumers sector lost 0.68 percent and posted 135 million euros of outflows, while the gold and precious metals sector decreased 6.00 percent and recorded 110 million euros of outflows. Investors are more exposed to the natural resources sector (2.557 billion euros of inflows), the information technology sector (880 million euros of inflows), and the banking sector (247 million euros of inflows).
The beginning of 2011 has been very eventful, making it difficult to comment with certainty on the development of sectors for the remainder of the year. The uncertainty about oil prices given political turmoil in the MENA region and the real danger of contagion, the unremitting difficulties of the peripheral euro zone countries to meet their sovereign debt obligations, the awareness of nuclear risk, and the inflationary pressures in emerging economies — hitherto the main driver of global growth — are key factors to watch carefully.
In this uncertain economic environment it seems judicious to focus on noncyclical sectors such as food processing, tobacco, and information technology. Gold, which has been neglected by investors since the beginning of this year, is likely to attract important flows. Instability in the MENA region will push up the oil price and thus support the oil sector. The pharmaceutical sector is one to monitor because of the eventual impact of the development of generic drugs and the drastic reductions in public spending, while the utilities sector could be affected by the increased profile of nuclear risk.
(Editing by Joel Dimmock)
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