Renaissance of the long/short equity strategies in 2019
Unit trusts, operating as independently as possible of the markets, are in demand in volatile market phases such as these, in particular. And yet, in 2018, expectations of investors in this equity strategy appear not to have been met. Hagen-Holger Apel, Senior Client Portfolio Manager of the DNB Fund – TMT Absolute Return, cites four success factors for a long-term and successful market-neutral equity strategy.
According to a current study[1] eight out of ten market-neutral equity funds show a negative performance in the past year. The longest uptrend in stock market history of the US Blue Chip S&P 500 Index made it extremely tough for long/short fund managers to make money on the shorts, plus volatility declined by late summer 2018 to ever-lower levels. No wonder then that many long/short equity funds performed negatively in this market environment. Given the topicality of this issue, Hagen-Holger Apel focuses on the success factors of market-neutral equity strategies which have been a part of DNB’s core offering since 2010:
Success factor 1: Place a focus on a few sectors
Many investment companies rely on a broadinvestment universe. However, it is clear that a focus on individual sectorscan pay off. With the technology, media and telecommunications sectors, or TMTfor short, DNB Asset Management has concentrated on one area only. Greater volatility compared withother sectors, in particular in the technology sector, enable additional returnopportunities. A diligent bottom-up equity analysis in connection with strongerfluctuations in these sectors make it possible to generate excess returnsrelative to the benchmark (Alpha).
The strategy of the DNB Fund – TMT Absolute Return isnot based on pair trades within one sector. It is much more important toconsider the relative valuation of individual sectors and of the individualsecurities together. At the moment, it seems that high growth/high valuation isregarded with scepticism by many market players following years ofoutperformance, whilst value is returning to the investors’ radar againfollowing sustained underperformance. Quite apart from that though, there arelots of opportunities within the investment universe based on the relativevaluations. As a result, in 2018 the portfolio managers on shorts activelypursued securities from the semiconductor sector comparatively early which theyanalysed as clearly overvalued. They also held long positions in Ericsson andLenovo, which make a significant contribution to the positive annualperformance.