European Equities – Between a Rock and a Hard Place

(May 23, 2012) — European equity managers are overpaying for stocks and holding highly concentrated portfolios as they struggle to stick to their mandates during the Eurozone crisis, research has found.

Fund managers are being forced into holding the very few stocks they are exceptionally keen on in the current volatile environment as even good companies have been impacted by the latest Eurozone troubles, S&P Capital IQ reported this week.

Peter Fuller, Fund Analyst and Sector Head at S&P Capital IQ Fund research, said: “A key finding from our annual review of the Europe sector is that portfolio concentrations are tighter than we have seen for several years as managers focus on their highest-conviction ideas. Typically, these are companies with the balance-sheet strength to finance growth internally in the absence of bank lending. However, whereas in 2011 it was widely recognised that good companies would overcome poor political governance, managers are now acknowledging that even good companies could be in danger.”

Over the past 12 months, the MSCI All Countries European index has fallen over 21%, with the index tracking value stocks in the region falling more than 26% – the largest drop in all regional indices.

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S&P Capital IQ found managers had been accumulating cash positions of up to 10% or higher, where permissible, instead of buying expensive stocks that may not provide good enough returns.

Fuller said: “The problem is that many of the traditional defensive names have already been bid higher to the benefit of European equity income managers who were already overweight these stocks.”

He added that small-cap managers were having to look into larger companies and niche managers had begun buying mainstream stocks in the hunt for returns.

Investors in the United Kingdom were being hit on both sides as sterling strengthened against the euro wiping out much of the small positive return created.

Last week the Bank of America Merrill Lynch monthly fund manager survey found investors were increasingly bearish on Europe as there seemed to be no end to the region’s troubles in sight. Relative to the 10-year history of the survey, investors reported one of the largest underweight positions on Europe and predicted a 2% fall in growth figures for the region.

(May 23, 2012) — A hedge fund seeding firm has created a forum for start-up funds to tap institutional investors who have been increasingly favouring larger players in the sector.

The IMQ Capital Introduction Network has been created by IMQubator, a platform that directs start-up capital to fledgling hedge funds. Funding of €250 million for that initial project was injected by Dutch pension investor APG in 2009.

Jeroen Tielman, CEO and Founder of IMQubator, said: “In introducing the global institutional industry to the new generation of hedge funds, IMQ has taken the inventive step of creating a proprietary, online intermediary network, whereby chosen agents can promote our underlying managers to their respective investor contacts.”

The platform will ‘host’ new funds and connect them with potential institutional investors through a network of advisers.

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Tielman said the structure of the network would ensure streamlining and transparency throughout the process and a number of “best-of-breed agents” were already on board.

Although inflows have strengthened to the hedge fund sector, small companies have struggled since the financial crisis, with new investor money mainly heading to larger firms.

In the first quarter of this year $18.3 billion was allocated to firms managing over $5 billion while firms managing less than $5 billion saw almost a combined $2 billion in outflows, Hedge Fund Review said last month.

The IMQ Capital Introduction Network will also act as a physical office for these new firms. Fund managers will share headquarters in Amsterdam, interact and be monitored by the ‘incubator’ and their peers.