Value investments outperformed growth and quality names in April


23 May 2018


April was a positive month for equity markets, leading to a partial reduction in the gap between the market’s peak in January and its low registered in March. Throughout the month, the MSCI World Index and the S&P500 underperformed in relative terms (returning +0.95% and +0.27% versus +4.72% for the Nikkei Index and +4.02% for the MSCI Europe Index respectively).

In Europe, value investments outperformed quality and growth names (returning +4.98% vs +3.86% and +3.06% respectively), following an increase of the long term risk free rates in Bunds and especially UST. During the month, the Euro depreciated sharply against the USD, returning to its end of 2017 level.

In April, the Fund returned +0.51%, allowing it to recover some of the losses suffered in the previous two months. Year to date performance stands at -0.59%, outperforming the MSCI Europe Index by 0.46 percentage points.

According to the Investment Adviser, the long leg of the portfolio has constantly been able to generate alpha in the mid term, delivering a sound relative performance. Year to date the best performing investment style is “value”, with the value funds in the portfolio delivering alpha and the other funds being in line with the market and their investment style indices.

From a macro point of view, global growth is still solid. Nevertheless, after a very good reporting season the best may be over both from a macro and micro point of view. According to the Investment Adviser, future earnings may still be good but unlikely as high as in the first quarter. Moreover, in late 2017 the global PMIs had already discounted a high level of optimism, with the team anticipating that the situation will be different at the end of 2018.

2018 is a transition year and as expected is proving more volatile than 2017. In the Investment Adviser’s opinion, the main risks are monetary policy (with the market potentially overreacting to excessive tightening by the Federal Reserve) and an inversion of the yield curve in the US, which the team anticipates will earliest happen towards the end of the year.

According to the team, the economy is currently in the late, and not yet final stage of the cycle, giving rise to a wide trading range with higher volatility and dispersion, at the same time yielding the last big opportunities of this market cycle.

In the mid to long term the team is waiting for the next bear market to materialise, but in the short to mid term equity markets still offer good opportunities. In the Investment Adviser’s opinion it is key to adopt a less directional approach, protecting assets when the markets reach the main potential inflection and resistance points, which is the reason why the team’s strict focus lies on volatility control.

The views and statements contained herein are those of Sofia SGR in their capacity as Investment Adviser to the Fund as of 17/05/18 and are based on internal research and modelling.