I’m not buying the bounce in equities, especially following the surprise cut in US equities. Why am I so cynical?

• Because the global economy needs coordinated fiscal stimulus not lower interest rates
• These lower rates might end up spooking investors rather than re-assuring them
• We’re only seeing the foothills of the economic damage about to be caused by this virus.

I stick by my view that we need at least a 15% correction, possibly as much as 20% for the S&P 500. The recent bounce back has only put that goal even further out.

I’m not the only one who is deeply cynical. MSCI has been stress-testing a new macro economic model for the Covid 19 emergency and their conclusions are I think echoing mine.

“We used a new macroeconomic model to estimate the market effects of a severe but plausible short-term downside scenario. At the end of March 3, our model-based macroeconomic analysis indicates that U.S. equities could drop a further 11%. Meanwhile, our stress-testing analysis says that a well-diversified 60/40 portfolio could lose approximately 7%: In this scenario, global equities could lose slightly more than 10% — while Treasury bonds could gain 2%, offsetting some of the equity losses.”

The ‘Boutique Premium’

I mentioned the boutique premium in my Citywire column this week, pointing to a new piece of academic research which I think has some fascinating numbers. The paper is by Prof Andrew Clare, Head of Asset Management at Cass Business School and it looks at the performance of boutique asset managers relative to their larger competitors. Now it must be said that the Group of Boutique Asset Managers (GBAM) –  a small ‘club’ of a dozen or so firms from around the world – are enthusiastically promoting this research, which of course provides some evidence for their USP. So, usual caveats apply.

Nevertheless, I think the research is hugely relevant.  Prof Clare’s first step was to define what is an investment boutique. To build a short list he asked “three leading investment consultancies that advise institutional pension schemes and insurance companies, as well as Members of the Group of Boutique Asset Managers (GBAM), to identify firms they believed to be boutiques in order to make a comparison”.

The boutique definition is then subject to the following inclusion criteria:

• the Principals held at least 10% of the equity in the firm;
• if investment management was the firm’s sole business focus;
• if the firm’s AUM was less than $100bn;
• and if the firm was not offering, exclusively, smart beta or fund of fund strategies.

This system identified 816 unique “boutique” investment management firms around the world. Professor Clare then looked at 120 large fund groups, identified over 780, long-only ‘mega funds’ across all equity sectors, and tracked their performance against the boutiques from January 2000 to July 2019.

In particular, Prof Clare’s analysis looked at four equity fund sectors– European large Cap; Europe mid/small cap; Global emerging markets and Global large cap.

His results?

• An “average outperformance of boutiques in Europe appears to be as great as 0.56% per year and 0.23% per year net of fees (or 0.82% and 0.52% gross of fees) depending on the methodology employed….
• the boutique premium, calculated as the difference in performance between Boutique and Mega active funds, ranges between 82bps and 52bps on a gross-of-fee basis depending upon the conditional model of risk employed.
• On a net-of-fee basis this figure falls to between 56bps and 23bps, again depending upon the risk model.
• We also find particular evidence of a boutique premium in two fund sectors: the European Mid/Small Cap sector and the Global Emerging Markets sector. “

That last (highlighted, by me) point is I think the relevant one. This premium is NOT robust across all asset classes but does seem to exist in Mid to small caps and EM equities. Intuitively this also makes sense – its what I would expect to find as smaller boutique firms exploited all those information asymmetries.

For reference, the main UK boutiques readers will be familiar with included: Aberforth Partners, Artemis, Carmignac Gestion, , Guinness Asset Management, Impax, Lindsell Train, Liontrust, , Miton, Montanaro, Octopus, Odey AM, Polar Capital, River and Mercantile, Sarasin and Partners, Somerset Capital Management, Troy Asset Management, Waverton IM, WHEB AM and Woodford.

New battery fund lists

Worth noting that WisdomTree in Europe has issued a new ETF – the Battery Solutions UCITS ETF (VOLT). The TER is 0.40%. The tracker fund has been developed in “partnership with Wood Mackenzie, a leading energy transition research and consulting firm, an innovative index that captures the battery value chain. The stock selection is informed by Wood Mackenzie market intelligence. To be eligible for inclusion in the index, a security must be involved in one or more of the following parts of the value chain: raw materials, manufacturing, enablers (correlated technologies and complementary solutions) or emerging technologies. The Index is both geographically and industrially diverse and was designed to evolve with rapidly developing technology”.

Main current holdings in the fund are listed below:

Companies: % of index

• Contemporary Amperex Techn-A5.29%
• Ganfeng Lithium Co Ltd5.03%
• GEM Co Ltd4.26%
• Solaredge Technologies Inc3.92%
• Hitachi Chemical Co Ltd3.74%
• Livent Corp3.72%
• Simplo Technology Co Ltd3.29%
• 17%
• TDK Corp3.12%
• ON SE2.95%

Sector Mix

Materials 35%

Industrials 34%

IT 16%

Country mix

US 24%

China 23.7%

Japan 19.53%

Product information