Value rally
In 2015, markets clearly favoured high quality measures, while, year to date, returns to these measures have reversed with low quality metrics such as high debt, low dividend cover and low return on invested capital providing good rewards.
This lower quality, value rally has resulted from some increased optimism but also a significant divergence in valuations between higher quality growth stocks and more cyclical companies. As a result of this, many quality growth focused investors have been finding new ideas hard to come by and have been adding to existing positions or retaining a little cash.
These managers and funds, such as Fidelity Emerging Markets and Comgest Growth Emerging Markets, have, of course, found 2016 a more challenging year in terms of relative performance, but others with more of a value bias, such as Lazard Emerging Markets and M&G Global Emerging Markets, have seen a return to above category average performance.
Despite rallies in the oil and mining sectors, there have not been increased allocations to these sectors over the year to date in terms of our aggregate peer group data.
In fact, there has been a slight move in the opposite direction, with the overall underweight to these sectors increasing slightly, indicating that many feel the recent rally has run its course. The other longstanding sector bias for the peer group is an overweight to consumer defensive names, and this remains in place.
At the country level, managers remain overweight India and underweight South Korea, reflecting the medium-term growth prospects of the former despite the recent disappointment in terms of the speed of progress, and corporate governance concerns in the latter.
