In a new report, the rating agency says that in post-crisis markets, there are five critical factors that have a direct implication for stock-picking: low growth prospects, the sovereign crisis, globalization, disruptive innovation and mass trading.
In this context, it says that many investment processes, such as value investing and GARP (growth at a reasonable price) need to be reinvented. Fitch says that while GARP aims to buy cheap growth, growth is becoming scarce; and, value managers are threatened by “value traps”.
Fitch believes that equity portfolio managers will have to manage from the top down, update their stock selection criteria, or think beyond blue chips indices.
It says, in a macro driven world, stockpickers cannot escape developing thematic, sector and country views, in order to identify growth opportunities or avoid value traps. And, to limit downside in stressed periods where increased correlation neutralises the benefit of stockpicking, macro overlays or hedging are gaining momentum, it says.
Additionally, stock selection criteria are also changing. “During most of the 2000s, valuation was the predominant criterion to select stocks. However, companies’ strategic analysis is now becoming the number one criteria, ahead of valuation,” adds Manuel Arrive, senior director in Fitch’s fund and asset manager rating group.
Finally, Fitch notes that managing against market indexes can be sub-optimal. It says that leading companies may be represented by mid-cap or overseas stocks that aren’t represented in domestic blue chip indices. “Stock-pickers will have to increasingly manage global or all cap mandates, with more concentrated portfolios, more radical sector choices or out of benchmark bets,” it says.
The report also notes the need to change investors’ habits, preferences and subsequently investment mandates.