Fund managers ride out pandemic by sticking with old playbooks
The Covid-19 pandemic upended almost everything, including the trajectory of the United States economy, which sank into one of the worst recessions in history and then rebounded into the fastest expansion in decades.
One thing that barely changed this whole time? Professional stock pickers’ tastes.
Active fund managers still favour stable growth stocks over cheap ones and are avoiding economically sensitive shares like banks and energy, just as they did during the market’s tumble in March last year.
Except for a growing aversion to industrial firms, managers’ preferences across sectors are almost identical to what they were almost 16 months ago, data compiled by Bank of America Corp show. In fact, almost three-quarters of the same beloved stocks remain in their portfolios.
“It’s mystifying how much the world has changed in the year, but how little the average portfolio has changed,” said Savita Subramanian, BofA’s head of US equity and quantitative strategy.
A case can be made that few traders see the spread of Covid-19 as a permanent game changer. Some have called the pandemic just an interruption in a prolonged regime of subdued growth. If anything, they say, the shutdowns accelerated trends already in place, like the shift towards automation and online spending.
Earlier this year, hedge funds — those that make both bullish and bearish equity bets — boosted their exposure to cyclical shares that benefit from an economic expansion, but have pared those bets more recently.
As a result, their cyclical positioning fell towards levels seen in the aftermath of the pandemic crash.
The cautious stance is understandable. Value stocks, a class dominated by cyclicals, trailed growth in 11 of the last 12 years. But recency bias can be dangerous.
Marko Kolanovic, the chief global market strategist at JPMorgan Chase & Co, warned in May that money managers who spent the bulk of their careers profiting from deflationary trends needed to quickly switch gears or risk an “inflation shock” to their portfolios.
Giorgio Caputo, senior fund manager at J O Hambro Capital Management, agrees.
“Many managers are probably still waiting for definite proof that the next decade’s growth could be more cyclical,” he said.
“The risk for many investors is that they may be caught flat-footed.”