(The following statement was released by the rating agency)
June 08 - Fitch Ratings says that when selecting stocks, equity fund managers are increasingly looking for quality, ie, sustainable growth based on solid competitive advantage that converts into high return on invested capital. This is consistent with an environment characterised by intense competition and low growth, in which disruptive innovation can create substantial divergence between corporate stories.
Over the six months since the publication of Fitch’s special report ‘Stock Picking in Equity Funds’, European growth stocks as defined by MSCI have outperformed European value stocks by 8%, which brings the three-year outperformance to 28%. Interestingly, while most investors do not expect positive returns from equity investments, European growth stocks have managed to deliver positive returns (+3%) over the past two years, unlike the broad MSCI Europe index and the value index (down 12%).
Investment processes that focus on companies with sustainable growth, high return on capital and strong competitive positioning have delivered better performance since 2009. As an illustration, European equity funds classified as “growth” by the Lipper Holdings based classification model have outperformed the broad European equity Lipper Global fund category by 14% over the past three years.
“This performance difference is explained by the structural trends at play. Fitch previously identified four critical factors that have a direct implication for stock-picking: low growth prospects, the sovereign crisis, globalisation and disruptive innovation,” says Aymeric Poizot, Managing Director in Fitch’s Fund and Asset Manager Rating Group. “In this context, quality growth remains a scarce asset, while value managers are threatened by ‘value traps’, ie, stocks stuck at a discounted price.”
As a consequence, stock picking processes are changing, with a greater emphasis on strategic analysis to identify companies with high return on capital and strong competitive positioning. Valuation criteria, which were the dominant factors between 2001 and 2008, now come second, to identify entry and exit points and adjust positions accordingly.
The special report ‘Stock Picking in Equity Funds’, initially published November 2011, is available on www.fitchratings.com.
To receive Fitch's research on fund management, please opt-in here