Large cap value area of choice for Spain

While fund selectors from Germany and Finland prefer small caps over large caps for both US and European equities, some 59% of fund buyers polled at the event in Madrid said they would rather increase their allocation to European large caps. Only 18% preferred small caps. Similar preferences were registered for the US, though they were a bit less pronounced.

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Looking for relative value

The Spanish preference for large caps echoes comments made by Schroders’ European equity fund manager Steve Cordell at Expert Investor Germany. He warned investors there is not much value left in small caps after the high returns made during the past years.

After a Spanish delegate remarked that absolute valuations are not particularly exciting across all asset classes, small cap manager Thomas Angermann from UBS Asset Management made an effort to persuade a sceptical crowd.

“The basements of the European equity market have been cleared out, so it’s indeed difficult to find real bargains,” Angermann admitted. “But on the first floor there are lot of exciting opportunities to find. Stock picking will make the difference, so it’s active strategies what you need.”

On the bond side, it’s also difficult to find good trades. But at least on the short term, high yield still offers some return, Kames Capital’s high yield bond manager Stephen Baines said.

“The high yield credit spread is still well in excess of expected defaults, which should lead to positive absolute returns. On the long run it’s unlikely that high yield returns stay as low as they are now, the key is just not to lose money when prices fall.”

In need of a portfolio shake-up?

Never in history have interest and bond rates stayed this low for so long. This prompted all but one panellist to call for more flexible ways to construct portfolios, while the fund selector audience took a more conservative stance with only 30% agreeing to the need for a shake-up in portfolio construction.

“The way portfolios are constructed has to change completely,” said Frédéric Jamet, head of ETFs at State Street Global Advisors. “A portfolio based on a certain allocation to equities and one to fixed income is outdated. How would you for example classify high yield or hedge funds? Focusing on factor allocation instead, using factors such as risk premium, liquidity and volatility, will be the beginning of a new framework.”

Angermann from UBS favoured an incremental approach. “There is no radical change needed, but rather a different type of thinking,” Angermann said. “As the bond market doesn’t anymore give us the returns we are used to from the past, a larger proportion of assets could be allocated to dividend yield funds.”   

Click here to see a slideshow of photos taken at Expert Investor Spain.

Platinum members can additionally view a full breakdown of the event voting data here, as well as long-term comparison graphs on the main asset classes here.

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