Being a fund manager is getting much harder. Not just the increasing competition and the formal regu...
Being a fund manager is getting much harder. Not just the increasing competition and the formal regulatory burden, but the meeting of targets. For some, it is just not fun any more, and having made a reasonable amount of money, they are quitting to find more fulfilment ' running bird sanctuaries or becoming a chef. Others still seek the buzz, but resent committees and clients hanging on their coat-tails, so they are going solo with private investment boutiques.
One of the biggest risks for investors is the increasing correlation between market sectors, so that when one sector moves, others move in the same way and to the same degree. Diversification is the very stuff of risk reduction, and it is becoming ever harder to find. For some time, whole markets have been getting more closely correlated. The way investment managers dealt with that was to diversify by sector ' so that global theme funds became a trend.
But now a view on a key sector denotes a view on the market as a whole. Who could have predicted a year ago that the information technology hardware and software sectors, with a market cap of $5.1 trillion, now account for 23% of the global benchmark? Within the IT hardware sector, the US accounts for 70%. European telecoms companies account for 42% of the global telecoms universe. If you get this size sector wrong, it is hard to recover. Globalisation influences a company's earnings through input costs, revenue, technology and industry structure. But now investors have to contend with global stocks, which are highly correlated with regional sector indices, making diversification within a sector but across markets far more difficult.
The TMT sector is the focus for concern, but the non-TMT universe is changing too. Stock correlation within non-TMT sectors is rising, and each sector is becoming more concentrated ' the biggest stocks accounting for an ever-larger proportion of it. All this means it is getting extremely difficult to take a bet against the market, not simply from a contrarian point of view, but in order to diversify.
Against their better judgement, and to satisfy logical but unintelligent market constructs like benchmarks, many fund managers feel they are being rail-roaded into holding positions they are uncomfortable with. There is huge personal and professional tension building up, with little time, in fast-moving markets, for real reflection.
However, there is one sector that currently stands out as offering low correlations both within the sector and across markets ' pharmaceuticals. The very mention strikes fear into the hearts of managers who were badly burned in the 1990s, and many rush to point out how expensive and vulnerable the sector is to political and regulatory influence. But pharma is a true global play (8% of the market in both the US and Europe). If you are bearish on the market, it has defensive qualities, if you are bullish, it is the best diversification offer going.
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