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Vector 2018 Annual Review
31 dec. 2018
While 2018 started off with a disappointing first quarter, where rapid wage-growth and a looming trade-war had triggered panic selloffs, markets generally recovered well during the second quarter of the year, which brought some reassuring earnings and macro-economic news. Yet, these tailwinds did not persist during the second half of the year. On the contrary, Q1 losses were but a hint of what was to come, as during the final quarter of the year investors were confronted with a cocktail of rising interest rates, declining business confidence and numerous geopolitical risks. This combination proved to be too much for many investors to stomach, giving rise to a classic ‘risk-off’ trade.
In Euro-terms the MSCI All Countries Net Return ended the year on a 4.85% loss, which isn’t too bad considering the exceptional run stocks have had during the past decade. Yet, this covers a lot of dispersion between styles and regions. US equities, for instance, closed the year with a tiny 0.25% loss in Euro-terms, which is a lot better than European companies (-10.57%) that eventually ended up having a worse year than Emerging Markets (-10.27%)!
There also was a marked difference in how investment styles performed over the year. While the divergence between value and growth was exceptionally strong during the first half of the year, with the latter outperforming the former by about 7.0%, this partially reversed during the second half. A Momentum strategy worked pretty well throughout the entire year, ending 2018 on a mere 0.1% loss. Yet, due to the abysmal year-end, the low volatility investment style turned out to be the absolute winner, returning 4.7% over the year. On the other side of the spectrum, riskier small caps suffered the worst, losing 10.1%.
Sadly, 2018 was not a great year for our funds. Our flagship, Vector Navigator, lost 11.01%. Our stock selection mainly suffered from our overweight in underperforming Emerging Markets, an inclination towards value and the dominance of value weighted indices compared to equally weighted indices. It is clear that the largest, least volatile companies drove the returns of the index in 2018. As the stock selection process in Navigator is equally weighted by default, this has been a serious headwind during the year.
The hedge in flexible was increased by about 10% during the year and now hovers around 50%, which is about 25% higher than the minimum coverage provided by the product. Yet, the gains from market timing were offset by stock selection, causing Vector Flexible to lose 8.17% during the year. While this is still better than the performance of the Morningstar Category, we had hoped for a better result.
We are confident that the factor premia will normalize and our active management will bear fruit again in 2019. In fact, the first weeks of the year have been very promising!
Werner, Thierry and Nils