FEATURE Fund manager optimism starts to return as equity inflows hit 35-week high

Fund manager optimism starts to return as equity inflows hit 35-week high

We’re nowhere near bullish territory but professional investors appear less gloomy

Based on conversations with fund managers at AJ Bell’s annual Investival conference for financial advisers, there is a feeling that professional investors are starting to become more optimistic after what’s been a very tricky year on the markets.

This tallies with how stock markets in many parts of the world have recently started to pick up. Bank of America even says the middle of November saw the biggest inflows for equities in 35 weeks.

A key reason why some fund managers are more upbeat than you might expect is valuations. This year’s market sell-off has presented them with the opportunity to buy nearly everything on the market (apart from energy and tobacco stocks) at much cheaper levels than 2021.

While the headlines are full of doom and gloom, you just need to look at the news flow from listed companies to realise things aren’t as bad as you might think. Plenty of companies are hitting earnings forecasts which shows they are holding up well in the face of recession.

It’s important to remember that stock markets are forward-looking, and they’ve already priced in lots of bad news around a slowdown in the economy. Stocks have plummeted in general this year, yet earnings have held up relatively well. That has created a disconnect between company fundamentals (earnings) and share valuations.

In a nutshell, fund managers now have one of the best buying opportunities in years. Some have been buying more of what’s already in their portfolio and others have been taking new positions.

WHAT ARE THE CATALYSTS FOR A MARKET REBOUND?

Retail investors are eager to know if the current rebound in the markets is sustainable or just a

Global equities have started to rebound over the past month

FTSE ALL-WORD (IN US DOLLARS)

450

400

2021 2022

Chart: Shares magazine • Source: Refinitiv

short-term event. This is difficult to answer because there are still so many headwinds – inflation might be easing in places but remains high, consumer and business spending remains under pressure, and interest rates are still going up. The trick is to understand the key bits of information that would get a thumbs up from the market.

Kirsty Desson, manager of the Abrdn Global Smaller Companies Fund (B7KVX24), says some of the catalysts to drive markets higher will be inflation rolling over, labour markets softening and a pivot from the Federal Reserve with regards to the fierce pace and scale of interest rate hikes in the US.

While some of these catalysts might not emerge until later in 2023, the fact the latest US inflation figures weren’t as bad as feared might be the trigger for other dominos to fall as we move into the new year.

WILL RATES FALL IF THERE IS A FED PIVOT? Clive Beagles from the JO Hambro UK Equity Income Fund (B03KR61) says it is important

to understand that a pivot doesn’t mean we’ll suddenly see interest rates fall. ‘It means the trajectory flattens. We might see a 50-basis point increase, and then a 25-basis point rise at the following interest rate decision.’

He doesn’t believe rates will be cut any time soon and therefore it’s time for value stocks to shine. ‘It’s not time to buy growth shares,’ he adds.

As a reminder, the term growth stock typically refers to a company which is expected to generate much greater earnings in the future than today. Rising interest rates have a negative impact when calculating the present value of those expected cash flows. That’s why investors have exited growth stocks in their droves this year, as central banks aggressively push up rates.

They’re now looking at value stocks which offer good cash flow and profits today and trade on cheaper valuations.

HOW GROWTH STOCKS HAVE DERATED

Polar Capital Technology Trust (PCT) is a good example of an investment trust that has suffered from having large exposure to growth stocks in 2022. Its share price is down 30% year-to-date as many of its holdings have derated – trading on lower multiples of earnings, something that’s also called ‘multiple compression’.

However, manager Ben Rogoff is remarkably upbeat, saying the potential rewards from investing in the sector look more interesting than 18 months ago as valuations are no longer excessive.

‘Despite near-term macro and market turbulence, we believe the worst of multiple compression is likely behind us and secular tailwinds remain robust,’ he says.

‘A lot of the excess has been worked off. Within the areas we like, a year ago there were 25 software companies trading on more than 20 times forward sales. Today there are none.’

Rogoff says if you looked at the fastest growing cohort of software companies at that time, on average the ones growing at more than 40% were trading at 40 times enterprise value to sales. The companies that comprise that group today now trade at 11-times. ‘There has been a very significant unwind,’ he comments.

‘The valuations now look much better and there is definite upside risk. We could be at peak inflation and peak Fed, we could see China reopen, who knows what will happen in Ukraine and maybe there are positives there; but there is no way that fund managers are positioned for that.’

Rogoff says cash levels among fund managers haven’t been this high since 9/11, implying that on broad scale there is still a sense of nervousness among professional investors.

‘The downside risks remain significant too,’ he admits. ‘We must anticipate higher volatility and people need to be sure about the investment timeframe they are looking at. But we still remain optimistic.’

Polar Capital Technology Trust

2,500

2,000

1,500

1,000

2018 2019 2020 2021 2022 2023

Chart: Shares magazine • Source: Refinitiv

DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author (Daniel Coatsworth) and editor (Tom Sieber) of this article own shares in AJ Bell. The author has a personal investment in Abrdn Global Smaller Companies Fund

By Daniel Coatsworth Editor

We’re long-term value investors, known for the depth of our research

Aurora Investment Trust plc is a closed-end fund that invests in UK equities and trades daily on the London Stock Exchange. Since January 2016 the portfolio has been managed by the specialist investment boutique, Phoenix Asset Management Partners. Phoenix have a unique approach to stock picking.

What makes us different? We are focused.

We typically hold 15 to 20 stocks in the portfolio because we believe in backing our best ideas. This gives us sufficient diversification and allows us to concentrate our efforts on what we own.

We stick to what we know.

We have developed a deep expertise in some areas and don’t operate beyond that.

We buy to hold.

Although we are buying shares, we consider ourselves as buying a whole business. Ideally, we look for a company whose prospects are so good we could hold them forever.

The ride can be bumpy.

Buying a focused portfolio of stocks that are out of favour can result in a lot of volatility. Unlike most of the financial services industry, we don’t consider volatility to be risk. Volatile markets provide investment opportunity.

Phoenix was founded by Gary Channon in 1998. He was inspired to create a fund management business using the “value investing” principles of great US investors such as Warren Buffett and Phillip Fisher. Over the last 20 years the Phoenix style has evolved, now applying value principles to buying a small number of high quality businesses, temporarily cheap due to short term bad news.

Aurora has a fee structure which aligns Phoenix’s interests with those of investors. There is no management fee. Instead, each year, Phoenix earns one third of the outperformance above the FTSE All Share. Investors are protected from subsequent underperformance by a “clawback” mechanism.

Award Winner: Citywire Investment Trust Awards 2022, Category: UK All Companies

www.aurorainvestmenttrust.com

This advertisement is issued by Phoenix Asset Management Partners Limited (PAMP), registered office 64-66 Glentham Road London SW13 9JJ, Company number 03514660. Authorised and regulated in the UK by the Financial Conduct Authority. Aurora Investment Trust Plc (“theTrust”) is a UK investment trust listed on the London Stock Exchange. Shares in an investment trust are traded on a stock market and the share price will fluctuate in accordance with supply and demand and may not reflect the underlying net asset value of the shares. The value of investments and any income from them may go down as well as up and investors may not get back the amount invested. There can be no assurance that the Company’s investment objective will be achieved and investment results may vary substantially over time. Past performance is not a reliable indicator of future performance.This advertisement is for information purposes only and does not constitute an offer or invitation to purchase shares in the Trust.The information contained within this advertisement has been obtained from sources believed to be reliable and accurate at the time of issue. Prospective investors should not rely upon this document for tax, accounting or legal advice and should consult their own advisors prior to making any investment. Copies of the prospectus are available from the Aurora website: www.aurorainvestmenttrust.com