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Selectors missed US equities opportunity amid volatility

Finance wave

Looking at Last Word Research data from April 2017 that surveyed European fund selectors on their 12-month forward-looking asset allocation intentions, fund buyers were the most keen on increasing European equity, absolute return strategy, global emerging markets, hedge long/short equity, and Asia ex Japan equity funds.

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Source: Last Word Research

Funds most liked by selectors

While European equities was the most popular, Asia ex Japan funds returned the best out of the top five assets they intended on increasing between April 2017 and April 2018.

Using FE Analytics, Expert Investor found that within the FCA Recognised universe, the sector average performance during 30 April 2017 to 31 May 2018 for European equities was at 3.03%.

Second favourite sector, absolute return strategy was at -3.1%, global emerging markets at 5.6%, hedge equity products at 0.3%, and Asia Pacific ex Japan at 9.4%.

Assets fund selectors were intending to buy the most performance 30 April 2017 – 31 May 2018

Source: FE Analytics

While the absolute return strategy sector returned in the negative over the same time period, it did return 0.5% during 31 December 2017 to 31 May 2018 amid political uncertainty-led  market volatility because of the uncorrelated nature of the funds. During this time the VIX index hit its highest since 2011 at 37.3 in February.

The VIX this year has not returned to the same levels as 2017, suggesting the fund selectors were right in pushing their absolute return agenda.

VIX index year to 6 June 2018

Source: Bloomberg

Since the start of 2018 only emerging markets out of the most liked asset classes performed in the red at -1.2%.

Assets fund selectors were intending to buy the most performance 31 December 2017 to 31 May 2018

Source: FE Analytics

According to Last Word Research, absolute return strategy funds are currently the asset class fund selectors are looking to increase the most over the 12 months to April 2019, suggesting selectors continue to expect more volatility in the market to occur.

Funds selectors looked to sell

The funds selectors were intending on selling over the year to April 2018 were developed market government bonds, developed market corporate bonds, and US equities.

According to FE Analytics, during 30 April 2017 to 31 May 2018 the sector averages of all these funds returned in the negative except US equities.

Assets fund selectors intending on selling the most performance 30 April 2017 – 31 May 2018

Source: FE Analytics

US equities returned 6.1% and performed better than all of the funds the selectors were intending on buying except Asia Pacific ex Japan equities.

While selectors were right to be cautious about the asset class with amid uncertainty about the direction of American policy under President Donald Trump and trade war risks, the asset class’ returns have been climbing since March 2018.

However, it is clear from the chart above that the asset class has been very volatile.

US equities remain unfavourable with European fund selectors as they are still intending on selling the funds over the year to April 2019, according to recent Last Word Research data.

Jassmyn Goh

Jassmyn reported from Sydney to New York to Jakarta before joining Expert Investor. She was most recently Features Editor at Money Management and Super Review in Sydney.

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