Good news for stock pickers
Hope for everything from small caps to once-ignored energy stock
Turmoil in megacaps such as Apple is stirring investor anxiety, but for professional stock pickers, it’s mostly good news when the market’s biggest companies loosen their grip. Hope for an economic rebound is breathing life into everything from small caps to once-ignored stocks such as energy.
Turmoil in megacaps such as Apple is stirring investor anxiety, but for professional stock pickers, it’s mostly good news when the market’s biggest companies loosen their grip.
Since the start of 2021, 57% of large-cap mutual funds have beaten their benchmarks, marking the industry’s best start to a year in almost a decade, data compiled by Goldman Sachs Group shows. A key driver is the easing dominance of megacompanies that funds chronically own too little of.
Now, hope for an economic rebound is breathing life into everything from small caps to once-ignored stocks such as energy, expanding the pool of winners. “As the market is seeing more leadership arrive from stocks that are lower in the market-cap spectrum, that ability to pick stocks is going to add value,” said Matt Miskin, co-chief investment strategist at John Hancock Investment Management. “It really comes back to active managers finally having their day in the sun.”
Heading into 2021, fund managers had increased their exposure to value to a record high while leaning towards cyclical shares, such as financials and energy. Those are this year’s best performers and value is off to the best start of a year in two decades relative to its growth counterpart.
So far, 2021 is shaping up as a more favourable year for active investing after the stay-athome, safety trade ruled equities in 2020. Among the six largest stocks — Faang, that includes Facebook, Amazon, Apple, Microsoft, Alphabet and Google, and Tesla, a new addition to the S&P 500 — four are in the red in 2021.
All told, 54% of S&P 500 stocks have done better than the broad gauge.
That contrasts with 2020, when only 37% of S&P 500 stocks beat the broad gauge, the lowest proportion since 1999, and the Faang block accounted for half of the index’s gain.
Among some 250 funds benchmarked to the S&P 500 that have at least $500m in assets, roughly 20% of them hold Faang stocks in greater proportion to their weighting in the index.
On average, the Faang-loving funds are up 3.2% this year, trailing a gain of 5.7% for those that have no stake, data compiled by Bloomberg show.
In the eyes of Morgan Stanley analysts, stock picking will be a bigger driver now that the broad market is pricing in an economic recovery. The team developed a model to identify areas where coronavirus-related benefits and damage appear mispriced. To them, banks, energy and airlines are among industries with underappreciated opportunities while sectors tied to durable goods and consumption from home are priced for perfection.
Lawrence Creatura, a fund manager at PRSPCTV Capital, agrees that there are abundant mis-pricings in the market.
“It’s as if someone went into the grocery store and changed all the price stickers on the products,” he said.
“There are now more products that have the wrong prices on them on the shelves and that’s a great thing for stock pickers.”
A former UBS Group executive is suing the bank after saying he was invited to invest in a “free punt” movie tax-break scheme that was eventually investigated by UK authorities.
Steven White, who was the bank’s global head of HR services, is seeking damages from UBS after investing £40,000 in the Ingenious film investment scheme that has been labelled as tax avoidance by the UK. White, who said he could not afford to gamble with his money, is among hundreds of individuals now suing the bank in London.
The lawsuit is the latest fallout from the decade-old British film partnerships tax scandal.
Investment in the UK film industry ballooned after the government boosted tax credits for funding movies in 1997. But UK authorities tightened the rules a decade later after questions over the legitimacy of some of the productions.
The movie schemes attracted funding from dozens of celebrities and football stars, but have faced a string of court battles since British authorities cast doubt on their purpose. Investors are now turning their ire onto the intermediaries, including banks, saying they gave bad advice.
White — who formerly ran UBS’s multibillion Swiss franc internal compensation fund within the asset management unit, according to his LinkedIn profile — said a colleague had called the investment “safe as houses” and “wholly without risk” when they discussed what to do with his bonus about the end of 2005. He said the colleague assured White that he had injected part of his own bonus in a previous partnership affiliated with the investment fund and that other investors received tax rebates.
“No reasonable adviser in UBS’s position would have portrayed” the film plan “as a ‘watertight’ investment,” White’s lawyers said.
A spokesperson for UBS declined to comment. The bank is one of dozens of defendants in the Ingenious lawsuit, including HSBC Holdings.
UBS has denied that the colleague would ever have labelled the investment as a “free punt” or “bet”. The bank never provided tax advice and relied on Ingenious’s own advice, the bank said in a legal filing.
White was a “sophisticated investor with substantial financial experience,” the bank said, saying it sent him a letter about the scheme noting “his adventurous attitude to investment risk.”
White’s involvement in the lawsuit came to light at a court hearing this month to decide who should represent the group in the lawsuit. UBS had pushed to have White replaced while lawyers for the group argued that UBS was making a “subjective judgment”.
Ingenious involved a series of investments in blockbusters such as Avatar and Life of Pi. Ingenious has previously denied that the plans were set up as a tax dodge and is in its own legal battle with the UK tax authorities over the issue.