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.

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.