Stock-picking skills should come to the fore as macroeconomic and investment-style factors loosen their grip on markets, says Geir Lode, head of Hermes Quantitative Equities.
Macro to micro: In mid-2012, macro and style factors accounted for 53% of the differences among global stock returns within sectors. At the end of February, they represented less than 27% as the importance of stock selection increased to a level not seen since before the financial crisis.
Proportion of cross-sectional volatility explained by style effects (%)
Source: FactSet 28/02/13
Going passive: Macro events and style factors, such as quality and growth, have dominated the dispersion among stock returns since late 2011. Markets shifted on policymakers’ moves to combat debt problems and stoke economic growth in the US and Europe. This drove many investors to focus on asset allocation and thematic or index-tracking strategies.
Now active: Narrow differences among the returns of equities within the same sector – in many cases, irrespective of their intrinsic value – made this a difficult time for stock-pickers. Now, the market holds more opportunities for active managers to outperform through stock selection as the influence of macro and style factors diminishes.
Time will tell: At the end of February, stock-specific volatility outweighed style factors in all equity sectors. However it’s too early to determine if this will continue. More stock-picking opportunities will emerge if macro and style factors subside further.