(Bloomberg) -- Some of this year’s best-performing European equity fund managers are betting their investments in technology stocks will reap further returns in 2021, even as optimism over coronavirus vaccines fuels a rally in value shares, threatening the funds’ performance.
Among funds with assets exceeding $1 billion that focus on western European equities, all 10 of the best performers had a tilt toward the digital, software and internet technology sectors, according to data compiled by Bloomberg. This is no surprise considering that the market recovery has been driven by growth stocks, but also makes these funds more vulnerable to a possible outperformance of cheaper value and cyclical companies in 2021 as the vaccines revive economies.
But so far, the outperforming investors are unperturbed. The Covid-19 pandemic triggered a major structural change that will accelerate the shift toward digital companies, while many other businesses will struggle to return to 2019 growth levels, says Henrik Nyblom. His Swedbank Robur Ny Teknik fund is up 73% in local-currency terms and 90% in dollars in 2020 for the best performance this year in dollar terms, the data show.
“I don’t see the need to change my process and chase short-term rotational factors,” said Nyblom, a Stockholm-based portfolio manager who typically invests over a three- to five-year horizon. “The long-term trends towards digital economies and way of life has only started. The underlying growth rate for tech companies still looks very strong over the coming years even if the year-over-year comparison in 2021 will be somewhat tougher than for some cyclical names.”
The best-performing fund managers may have reason to be confident in their ways. While the MSCI Europe Value Index surged by nearly 20% in November on the optimism of vaccine progress, in December the gauge is up less than 1% amid concerns about Brexit negotiations and lack of fresh U.S. stimulus. And while value bulls have been betting on the outperformance of cheaper equities for years, the prediction has rarely panned out over the past decade.
The problem standing in the way of some of the biggest value sectors -- energy and banks -- is that they face fundamental headwinds, such as the price of oil and low interest rates, which can’t be easily cured by the economic recovery.
“Those betting on a revival in some of the value names are deluded,” said Stephen Paice of Baillie Gifford & Co., whose European Fund has beaten 98% of peers this year and is up 40% in pounds. “I don’t believe in a mean reversion to lower-quality companies that are facing a lot of disruptive trends, particularly in Europe when it comes to financials or banks or energy companies.”
Other investors, like Handelsbanken Fonder AB’s Oscar Karlsson, are hedging their bets by diversifying into cyclical stocks. Karlsson, whose fund is on track for its best performance since 2009 in dollar terms, owns truckmaker Volvo AB and mining company Boliden AB.
Funds focusing on Swedish equities dominated this year’s top performers in Europe, making up six of the top 10 in dollar terms, according to the Bloomberg data. A strong presence of digital businesses that have flourished during the pandemic has given the country’s stocks an edge this year, with cloud-based platform provider Sinch AB quadrupling in market value to lead the Stoxx Europe 600 Index.
Sinch’s stellar rally, along with other investments such as cosmetics retailer Lyko Group AB and heating technology firm Nibe Industrier AB, helped AMF Aktiefond Smabolag post one of the best performances among peers in 2020.
“This year the winning concept has been to dare keeping the shares that you really believe in for the next coming years even if they have outperformed the market,” said Angelica Hanson, the fund’s portfolio manager. “I think the trend is there to stay even for the coming year, even though it could be a bumpy road.”
©2020 Bloomberg L.P.
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