Wondering what's going on in stock markets ? It's all about positioning
2016 will go down as the year of the underdog. Leicester City winning the Premier League at odds of 5000 to 1, BREXIT at 7 to 1 and Donald Trump at roughly 5 to 1. These were all unlikely scenarios that went against conventional wisdom. And so it also meant that fund managers were not prepared for them and everyone was positioned in the same way, ie overweight quality, long duration shares and underweight more cyclical areas of the market. After all the perceived wisdom was that oil would stay at $30 / bbl, iron ore would sink below $30 / ton and Glencore was almost certainly bust. Inflation was dead and growth moribund. In fact some high quality European companies such as Pharmaceutical company Sanofi could issue bonds with a NEGATIVE yield (as in you had to pay Sanofi interest for the pleasure of holding their bonds). In contrast high ROCE cash compounders like Sage had rerated from a 15x PE 4 years ago to over 25x.Put another way, positioning had become consensual. We can see that because many UK equity unit trusts outperformed the FTSE AllShare by 10% or more in 2015. The FTSE AllShare was 4th quartile against the All Companies peer group. Passive investing was dead, long live active investing!
The reverse is true this year, those that outperformed hugely in 2015 have for the majority underperformed by almost a similar margin in 2016. It is not uncommon for fund managers and their unit trusts to have outperformed the AllShare by 12% last year, only to give 10% back in underperformance this year. I havent checked but I bet the FTSE Allsshare is top decile YTD. Ouch!
This consensual positioning creates real head aches for fund managers. For the most part they are bottom up investors who generally believe (nb what follows is a gross generalisation on my part) Benjamin Graham's assertion that "in the short term markets are voting machines, in the long term they are weighing machines". That is to say that companies in future will be valued off the cash stream they produce. So good quality companies like Sage and Unilever with good and growing market positions combined with strong cash flows are highly likely…
