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Positive news of potential Covid-19 vaccines handed a long-awaited boost to value stocks, fuelling a sector rotation that some hedge fund managers believe could mark the start of a long-term recovery by the equity sector.
Since the start of the pandemic, growth stocks including the FAANG tech giants and video-conferencer Zoom have risen by double-digits, supported by national lockdowns and a sudden rise in home- working.
Value stocks plunged, including airlines, automotive stocks and some hospitality groups, following a major drop in consumer demand, socialising and international travel.
“I am very optimistic on vaccine news,” said Stuart Roden, former Lansdowne chairman and a veteran of the discretionary hedge fund sector.
“I do believe there is much upside to many of the shares that have done poorly over the past years – many of the good companies that have survived this pandemic will emerge stronger as valuations are very low.”
Drew Dickson, founder of London-based stock-picking hedge fund Albert Bridge Capital, agrees.
“The growth-momentum regime was already in place – if not extended – even before Covid-19 showed up. The pandemic then took that trend to historical levels of outperformance and mispricing,” he said. “If it was a mistake to buy value stocks after the first leg down during the pandemic, it is probably a
mistake to buy growth/tech stocks after the first leg down following the vaccine that will end it.”
Long/short equity funds, which were pummelled by a sell-off at the end of October sparked by growing virus pessimism and US election nerves, have begun November well. Adelphi Capital’s main fund rose 4.7% in the first six days of November, the UCITS version of Egerton Capital’s flagship rose 3.3% in the first 10 days and Brummer & Partners-backed long/short funds rose in the first half.
But Paris-based Lyxor Asset Management said returns for hedge funds were “uneven” after the Pfizer vaccine announcement. “Long/short equity returns were highly dispersed. Caught off guard, managers overweighing growth and ‘work-from-home’ stocks at the expense of value and Covid-19’s prime victims were severely hit, especially in Europe given the extreme rally in airline and financial stocks,” Lyxor said in a note.
“It was most beneficial for special situation and long/short credit strategies (boosted by their beta rather than by their alpha), but painful for CTAs and some global macro” Two vaccines – developed by US biotechnology firm Moderna, and Pfzier and BioNTech – were found to be highly effective in late-stage trials, causing the iShares Russell 1000 Value ETF to rally. While Alessandro Fugnoli, head of strategy at Milan-based discretionary asset manager Kairos Investment Management, believes that a large sector rotation is on its way, he thinks that the change won’t be immediate, and discretionary hedge fund portfolio managers will have several months to change positioning.
“From now till the summer there will be time to adjust portfolios, step by step,” he said. “In the initial phase [of the rotation] it will be good to buy the least compromised sectors – consumer discretionary such as the airline industry, for instance – and among the best sectors, the least indebted companies with the best cash flows figures.” Data from Bank of America also show that global equity funds received record inflows of $44.5bn in the week ending 11 November, when Pfizer first declared the interim results.
