Markets have been unforgiving in 2022. Especially in the second quarter.
A pincer movement between inflation and growth has compounded the concerns about the war in Ukraine to wreak havoc on many sectors in the world’s stock markets and in investor funds. Fund managers have had quite different experiences depending on how they have been positioned.
Looking at Irish Balanced Managed funds all with a risk rating of 4 (which might suggest we should be looking at reasonably similar outcomes), there is over a 10% range in returns delivered by managers in the last six months. For sectors like North America, the dispersion of returns can be over 20%.
So clearly fund managers have positioned portfolios differently.
For those who like labels, we can look at how value and growth styles have performed so far this year. Growth clearly has been in the ascendancy for decades with value making brief forays into the limelight. 2022 seems to be on the those episodes, and the numbers are startling – US Value is down by about 9% but US Growth is off 28%. So both styles have delivered negative returns
The catalyst for Growth’s decline is most likely higher interest rates which choke the present value of future income streams. But it’s also the case that there has been a negative business backdrop for many of the key names. The table below highlights the businesses which would feature in a US Growth index and how their prices have performed so far this year (correct at time of writing):
| Amazon | -38% |
| Apple | -27% |
| -49% | |
| eBay | -35% |
| -26% | |
| Netflix | -70% |
These stocks have been clear winners in recent years – even performed well in the pandemic economy – but have now torpedoed portfolio performance for many.
Higher yields and interest rates will continue to put pressure on growth stocks, but for some stocks that may already be in the price – especially if the view that the rate of inflation may have peaked in the US proves correct.
Did it make any sense diving deeper and maybe getting some “cover” from market conditions in the small cap arena? There has been little relative benefit from owning smaller stocks in 2022 so far. In the US, small cap indices have been as poor as their larger cousins, while in the UK small cap stocks also posted significant losses.
Even funds with the ability to go short (and benefit from falling asset prices), so called Absolute Return funds have found the conditions difficult to navigate. Over the last 6 months the two highest profile absolute return funds in Ireland on average are down 6 to 8%.
There seems to have been no hiding place for mainstream investors in 2022 to date. Obviously assets like property have performed well as rents are holding up and there is no “mark to market” risk. For a typical institutional property fund, we are looking at a 2-3% return over the last 6 months.
Even for a fund manager who had 20/20 vision and opted to overweight commodities, it wasn’t straightforward. Of course energy has done well. But in recent years many investors, wary of the geo-political risk or “ESG” risk in the energy sector, looked for indices which excluded energy but instead concentrated on the more economically sensitive industrial metals. The difference is stark. Broad commodity indices are up about 40% year to date; non-energy versions are up less than 11% and in fact have been in decline since March.
In a world of tumbling bond and stock prices, it’s been hard to find a safe harbour, and tough to act in a timely fashion. Large institutional portfolios with their incremental decision-making processes bear a lot of market pain. Many of the broker strategists stick with (usually) higher equity contents even as stocks free-fall.
Even at a stock level, it can be hard to reverse opinion, even in the face of extreme performance. Last week, an analyst with a major Wall Street firm lowered their recommendation on Netflix – after the stock had declined 70%!
Tradewinds 