Europe’s investors ride the next wave of sector rotation
Search for potential return-enhancing themes accelerates
25 Sep 2020 | The Asset

The coronavirus pandemic is reinforcing the benefits of a sector-specific approach to investing, according to a recent report.

Travel, healthcare, and energy are among the sectors to have been severely affected by the Covid-19 pandemic. In the financial markets, although the worldwide sell-off in March did not discriminate by sector, the recovery did, the report, published by Cerulli Associates, notes. Sectors vulnerable to the effects of the pandemic, either directly or indirectly via weakening economic conditions, have been slow to recover.

At the end of July 2020, the assets under management (AUM) of sector-specific products in Europe amounted to 474.9 billion euros (US$564.3 billion), representing a steady rise from 176.9 billion euros in 2013.

Fabrizio Zumbo, associate director, European asset management research at Cerulli, points out that sector rotation has been part of a secular change in investment over the past decade. In 2013, real estate, energy, and financial sector funds collectively held 35% of market share by AUM. By the end of July 2020, this figure had fallen to 17% as investors shifted to technology-driven and newer-age investing.

“The prevalence of the FAANG—Facebook, Amazon, Apple, Netflix, and Alphabet (formerly Google)—companies in our everyday lives has played a large part in this shift,” Zumbo says. Currently, 27% of assets in sector-themed funds focus on the technology, information technology, and biotechnology industries. Health care funds, the second-largest category with 56.4 billion euros of AUM, are benefiting from strong tailwinds such as aging populations in many parts of the world and medical advances.

Raw material/energy funds have had a difficult time in recent years, with their AUM falling from 21.5 billion euros in 2013 to 15.1 billion euros at the end of July 2020, in part due to the Covid-19-linked decline in the oil price in March and the price war between Saudi Arabia and Russia. Financial stocks have also struggled in the low-interest-rate environment.

One barrier to the adoption of sector products is the way traditional portfolios are constructed, especially in the advisory and institutional realms. Top-down selection prioritizes coverage of major geographies and asset classes—sector focus is something of an afterthought, in place only to ensure adequate diversification. However, this mentality may be slowly changing.

Zumbo states: “A growing number of multi-asset managers are reserving space for sector-based investments or even using them as building blocks to construct portfolios from the bottom up.”