Investors' moves to risk-on/risk-off is creating opportunities for stock pickers to invest in individual companies as exchange traded funds (ETFs) and global macro investing change the shape of investing, fund managers have said.
Standard Life Investments head of global equities Mikhail Zverev said the growth of ETFs to reposition portfolios or take broad sector or regional views had contributed to the macro-driven behaviour of the market.
Both ETFs and global macro investing - through global macro hedge funds and absolute return products - contributed to the weight of money that traded stocks, based on macro views.
"All of these factors are resulting in greater market correlations and market volatility," Zverev said.
AMP Capital senior portfolio manager Michael Price said in highly correlated markets, "it's becoming harder to stand out from the crowd".
Thorough fundamental research was the key to "insights and exploitable investment ideas to include in our portfolios. It's impossible to model a company's earnings "bottom-up" without recognising the "top-down" macro environment, so both elements are of critical importance to us."
Fidelity Worldwide Investment head of Australian equities Paul Taylor said at present, most companies were trading around very similar ranges regardless of quality or growth.
"There should be differentiation, there should be discernment in the market - and there will be at some stage - and that's where we see opportunities. Companies that can deliver a high and sustainable dividend yield, or companies that have growth in a low-growth world, or both, will be bid up by the market. They are the ones we want to own," he said.
Zverev agreed with both Price and Taylor, saying the market was often "less willing to differentiate between specific companies, preferring to trade stocks as if their underlying fundamentals were almost identical".
In an environment where more market participants were overlooking stock specifics in favour of macro and sentiment drivers, returns available to stock pickers should be enhanced.
For example, Australian-listed mining firm Iluka Resources belonged to the minerals sector which performed poorly as the market shunned cyclical stocks in 2011, he said.
"There were concerns about China's economic slowdown, however Iluka's stock-specific factors more than offset these sector headwinds. Changing supply/demand balance, increasing pricing and the company's superior resource position, resulted in a string of strong results and market updates which ultimately drove shares up 73 per cent on an absolute basis, substantially outperforming the MSCI World index," he said.
Price said that getting earnings forecasts correct ahead of the market came from either top-down or bottom-up insights.
"Ultimately we're trying to identify situations where the company's ability to generate earnings is not correctly reflected in the share price," he said.
Short positions could be put on companies which were likely to disappoint the market to benefit from a decline in their share price.
Environment, social and governance (ESG) engagement and research were essential, he said.
"Sustainability of a company's business model is another key element in the investment process ... and over the long-term we believe ESG factors are influential in identifying a company's intrinsic value," he said.
"In particular, substantial value can be added by avoiding or even short-selling companies - if the strategy allows this - where the underlying business model is structurally flawed."
