Multi- manager View

Fashion can be a fickle mistress. Since the turn of the year, the shares that the market could not sell quickly enough in 2011 have been magically transformed into 2012’s must-have items.

Share prices across the mining sector plunged by 30 per cent in 2011 but the sector stands some 19 per cent higher than it did on January 1 – not a bad return in five weeks. Banking sector shares tumbled by 30 per cent last year but have shot 19 per cent higher.

Conversely, the pharmaceuticals and biotechnology sector, which posted an14 per cent gain in 2011, has fallen by 2.4 per cent.

In part, this may be a seasonal anomaly in which investors rebalance portfolios dragged out of line by last year’s market movements. If a stock or sector performed well last year, its weighting may have swelled to become an unacceptably large part of a portfolio from a risk management perspective, triggering a sale despite supportive fundamentals.

Perhaps more important, this turn-round seems to have resulted from increased levels of optimism. The US is creating enough jobs to lower the unemployment rate and there are hopes that policymakers in China could use monetary stimulus to prop up demand. Together, this has seen investors rushing to embrace the industries and sectors that are most strongly geared towards stronger global growth.

In this sense, the underperformance of defensive sectors has little to do with unattractive fundamentals but is a result of the logic of sector rotation – to raise money to invest in banks and miners, investors must sell something else.

The second factor seems to be the long-term refinancing operation by the European Central Bank. This has put an end to worries of an imminent liquidity crisis, allowed banks to rebuild their balance sheets through a carry trade and handily provided eager new buyers for bonds issued by governments on the peripheries of the eurozone.

With markets range-bound, investors must be ready to take profits aggressively and recycle those profits into underperforming areas. For most of the past two years, markets have traded in a range, falling when the macro situation seems bleak and rising when central banks ease monetary policy. These waves of optimism and pessimism can make a buy and hold investment policy unrewarding.

Staying on the right side of the risk-on/risk-off trade can be difficult. Fortunately, our experience was building diversified portfolios and favouring absolute-return- minded managers can help preserve capital. We believe that is likely to remain the case.

A well balanced, well diversified portfolio with an absolute-return bias seems likely to remain the best policy.

Andrew Perham is investment director of multi-manager at Swip