What do Catella’s fund managers think about the stock market situation right now, and how do they view the possibilities of being able to generate returns despite low interest rates, uncertain economic activity and regardless of stock market performance. This was the theme of one of the events during Catella Day, a panel discussion between three of Catella's hedge fund managers, Mattias Nilsson, Martin Jonsson, Anders Wennberg, and Carl Berg.
What does the Catella panel think about the market?
The panel believes that we are at the peak of a prolonged cycle with both record margins and record low interest rates. The stock exchange currently has high multiples, which can easily have a negative impact on the view of stock market performance. Corporate profit growth is about to fall below zero, and the least likely scenario is that we will have a strong and long-term economic recovery. This is also reflected in how the stock market is extremely defensively positioned, which is due to obvious economic fright. At the same time, there are signs that economic activity may have bottomed out since, among other things, global purchasing manager indices have fallen for 15 months in a row. The panel believes that we are most likely entering a recovery that will be shaky and short-lived like the situation we had in 2010-2016. This is likely to drive a rotation towards more value-emphasized, cyclical and interest-sensitive investments.
Hedge fund management – Perfect in theory, impossible in practice. Or?
Hedge fund management is sometimes criticised for being a theoretical model that does not work in practice. But, according to the panel, this is an unfair and incorrect claim. People who make this claim tend to compare the performance of hedge funds with the market return from the trough to the peak, and do not make the comparison over an entire business cycle. Right now, this means that many people are focusing on the 14 percent return that the US stock exchange has given on average since the low point of 2009. While the actual return over the entire cycle is just under 6 percent. Any return that exceeds 6 percent requires some kind of market timing and cannot be achieved solely with passive investing, as many believe or claim.
The focus for Catella’s fund managers is almost entirely on equity analysis and stock picking. They try to generate returns based on stock selection and not by taking market risk. They always start with detailed statistical models in order to be able to estimate a company’s earnings capacity in both the short and the long term. Now that there is great uncertainty, Catella’s fund managers have put extra effort into keeping close to the companies to be able to quickly detect any changes. This is where meetings with company management are an important tool. As an example, they have met the management of all major Swedish engineering companies at least 1–2 times since the summer.
What does the Catella panel think about active management and stock picking. Will this exist in the future?
Passive management is growing and will grow even more. In the European market today, passive management accounts for just over 25 percent of the managed volume of shares. The forecast is that this figure will be 50 percent by 2025. When market forces become so strong and the buying flows are concentrated to only shares included in the index, the panel is convinced that mispricing will occur as passive management grows. There will be good opportunities to find both buys and shorts. The panel also believes that the basis of stock picking will probably never change. On the other hand, the themes and leading sectors will shift. The link between individual stock prices and profit growth will never be broken, but the rubber band that forms the relationship between the valuation of profit growth and share pricing will sometimes be stretched a long way in either direction.
What trends and changes do you see on the panel?
Something that the panel sees has swung sharply in recent years is investor attitudes towards ESG. ESG stands for Environmental, Social and Governance. Investors require that fund companies and fund managers behave and invest in a way that is sustainable from environmental, social and governance perspectives. Inflows to funds that invest sustainably have increased significantly and are an important change that will have resilience. Catella Hedgefond is one of the leading funds in ESG and has taken a big step in having perhaps the toughest exclusion criteria in the hedge fund segment. The panel describes how they work actively with company dialogues and make great efforts to identify sustainable cases to include in the fund based on a tight return perspective in areas such as cleantech and renewables.
To conclude Catella Day, Catella Fonder’s Head of Fund Management, Thomas Elofsson, summed up the view of the managers for the coming period. He highlighted three main themes:
- Active management vs. passive management
Passive management is growing and will grow even more. In Europe today, passive management accounts for just over 25% of managed equity volumes and the forecast is that that figure will be 50% by 2025. When market forces become so strong and purchasing flows are concentrated to only the shares included in the index, Elofsson is convinced that mispricing will occur as passive management grows.
- Sustainable investments
Elofsson pointed out that investor attitudes have changed very quickly in just a few years. If you want to survive as a fund company or portfolio manager, you must think about sustainability in a holistic perspective, for real. The inflow of capital into ESG funds has increased significantly and will continue to increase in the future. Elofsson also highlighted that, of course, incorrect pricing will also occur for sustainable companies as inflows increase, and this creates good opportunities for active managers.
- Growth - interest rates - debt
We face long-term demographic challenges, says Elofsson, and points out that annual population growth has declined steadily since the 1990s. This has a negative impact on inflation. Although the expected return on bonds is non-existent, there is still a record flow to bond funds. Elofsson believes this means that investors are simply settling for lower returns. This has also left its mark on the stock exchange as many companies and sectors have been interest-driven for some time.
Because expected growth is low and interest rates are non-existent, investors have bought growth shares and sold value shares. Elofsson says that these circumstances will result in incorrect pricing, which can create opportunities for active management.