Europe’s Investors Ride the Next Wave of Sector Rotation

September 25, 2020 — London

The search for potential return-enhancing themes accelerates

The coronavirus pandemic is reinforcing the benefits of a sector-specific approach to investing, according to the latest issue of The Cerulli Edge―European Monthly Product Trends.

Travel, healthcare, and energy are among the sectors to have been severely affected by COVID-19. In the financial markets, although the worldwide sell-off in March did not discriminate by sector, the recovery did, notes Cerulli Associates. Sectors vulnerable to the effects of the pandemic, either directly or indirectly via weakening economic conditions, have been slow to recover.

At the end of July 2020, the assets under management (AUM) of sector-specific products in Europe amounted to €474.9 billion (US$564.3 billion), representing a steady rise from €176.9 billion in 2013.

Fabrizio Zumbo, associate director, European asset management research at Cerulli, points out that sector rotation has been part of a secular change in investment over the past decade. In 2013, real estate, energy, and financial sector funds collectively held 35% of marketshare by AUM. By the end of July 2020, this figure had fallen to 17% as investors shifted to technology-driven and newer-age investing.

“The prevalence of the FAANG—Facebook, Amazon, Apple, Netflix, and Alphabet (formerly Google)—companies in our everyday lives has played a large part in this shift,” says Zumbo. Currently, 27% of assets in sector-themed funds focus on the technology, information technology, and biotechnology industries. Health care funds, the second-largest category with €56.4 billion of AUM, are benefiting from strong tailwinds such as aging populations in many parts of the world and medical advances.

Raw material/energy funds have had a difficult time in recent years, with their AUM falling from €21.5 billion in 2013 to €15.1 billion at the end of July 2020, in part due to the COVID-19-linked decline in the oil price in March and the price war between Saudi Arabia and Russia. Financial stocks have also struggled in the low-interest-rate environment.

One barrier to the adoption of sector products is the way traditional portfolios are constructed, especially in the advisory and institutional realms. Top-down selection prioritizes coverage of major geographies and asset classes—sector focus is something of an afterthought, in place only to ensure adequate diversification. However, this mentality may be slowly changing. “A growing number of multi-asset managers are reserving space for sector-based investments or even using them as building blocks to construct portfolios from the bottom up,” says Zumbo.

Other Findings:

  • Denmark and Germany joined a select list of countries in July by re-entering positive net fund flow territory for the year. Many other major markets, including France, Italy, and the U.K., will be keen to join the list. Investors from the U.K. appear to be losing patience with their portfolios—this is the second month in a row that net new flows into long-term funds have been negative. The FTSE 100 index is still well down on the highs it set in mid-January.
  • Money market funds accounted for the bulk of new money in July—their net inflows of €69.3 billion was the highest monthly total so far this year as Europe’s investors continue to hold back reserves and reduce risk. Most of the buying activity took place in euro-denominated funds: net inflows of €41.9 billion meant that 60% of all net sales went into the category.
  • European cross-border funds continued their positive streak in July, attracting €67.2 billion. Inflows were 51% higher than the previous month (€44.6 billion). However, investors in the cross-border market remained conservative during July, with money market and fixed-income funds accounting for the bulk of net sales, gathering €38.0 billion and €22.5 billion respectively. Net sales for equity funds were €6.3 billion.

Note to editors

These findings and more are from The Cerulli Edge―European Monthly Product Trends, September 2020 Issue.

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