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Vector 2016 Annual Review

31 Dez 2016

With a gain of 11% 2016 turned out to be a rather fruitful year for equity investors. However, the year didn’t really start off as a success: a cascade of bad news brought on double digit losses that plagued the stock markets well into February. Indeed, around the turn of the year investors were very preoccupied with the crashing oil price and a possible global recession. It took another round of Super Mario’s famous “Bazooka” (=fiscal stimulus) and a dovish Janet Yellen for market sentiment to finally recover. While by the end of the quarter markets were still at a loss, they had rebounded significantly from their February lows: in little over a month the MSCI All Countries index had regained no less than 10% of its value.

The biggest political event of the second quarter undoubtedly was Brexit. Yet, its immediate market impact wasn’t that detrimental to investors’ wealth: while Brexit did cause indices around the globe to record significant losses in local currencies, the appreciation of the dollar softened the blow for European investors who held a global portfolio. Overall the MSCI All Countries was only down 2.7% in Euro-terms immediately after Brexit, which is a modest loss. Moreover, after the initial post referendum drawdowns, markets rebounded sharply during the early weeks of July as investors realized that any fallout from the decision to leave the European Union was unlikely to have a significant impact on global growth prospects.

Yet, 2016’s biggest surprise came in the form of the US Presidential elections, where Donald Trump – contrary to the bookmakers’ and pollsters’ expectations – was elected as the 45th President of the United States. Whether Trump will make a good president remains to be seen, but it is undeniable that the stock markets were quite keen to see Mr. Trump in the Oval Office. The US markets in particular took an advance on the new administration’s election promises of introducing additional fiscal stimulus in the form of tax cuts and increased infrastructure spending. Emerging markets understandably didn’t react equally well to Donald Trump’s victory. The president-elect’s skeptical views on globalism made investors fearful of the impact renegotiated trade agreements might have on these export-oriented economies.

Overall, we have some mixed feelings about our funds’ performance in 2016. While on the one hand Navigator and Flexible received several awards (De Tijd/L’Echo, Trends Fund Award and Morningstar Award) as best global equity and flexible allocation fund, we did not perform as well as we had hoped during the year. Even though Navigator’s return of 6.05% is in line with the Morningstar Category, we did fail to beat our benchmark index by some margin. As Vector Flexible’s performance heavily relies on the alpha provided by the same underlying pool of investments as Navigator, the fund also suffered. Its performance of 1.35% is again in line with the Morningstar Category, but below the target we had set for ourselves.

Looking at the underlying factors, the main cause for the negative alpha we have seen lies in the factors that are directly derived from analysts’ input: earnings revisions, analyst recommendations, etc. Almost all of these factors have underperformed in 2016. The model does of course not solely rely on these inputs, but they do have a relevant role to play in the overall score. Moreover, there has been a remarkable rally in low quality stocks (low earnings, trailing returns, etc.). Since we have a preference to invest in stocks that offer “quality at a reasonable price”, we missed out on the upswing in 2016’s most profitable market segments: mining and oil companies, and especially those whose profitability has been under heavy pressure over the last few years.