Stock specific factors have become more important, not less so, when determining the future performa...
Stock specific factors have become more important, not less so, when determining the future performance of a stock, according to research from Standard Life.
Stuart Fraser, head of continental European equities at Standard Life Investments, said the group's research has shown that while in the 1980s, 20% of a stock's performance could be attributed to stock-specific factors, in the 1990s this has risen to 40%.
Fraser said that even though the apparent polarisation between old versus new reminds fund managers to keep sectoral considerations in mind, it is the fundamentals of stocks that remain the drivers of performance.
Andrew Gibbs, fund manager of the M&G European Smaller Companies Fund, has also emphasised stock specifics as the real drivers of performance.
Using the analogy of a merchant buying sardines because the sardine market is rapidly rising and he can sell them on at a higher price, Gibbs demonstrated the momentum trap where investors can be left holding devalued or worthless stocks once the sentiment driving the momentum stops.
The merchant in the analogy is left holding sardines that he can no longer sell, but when he tastes them he finds they are unfit to eat because they are 'trading sardines'.
Gibbs said fund managers had to 'taste' the stocks that they held, looking for sustainable business models which were scalable, durable and self-sustaining, otherwise fund managers faced with a momentum market are left trying to apply new valuation criteria which have no absolute value.
He compared the technology rise and correction to the market reaction to the appearance firstly of the mainframe, then the PC, and finally the internet, all of which he said were overvalued and subsequently corrected.
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