Monday, July 6, 2015

After the Bloodshed

As Greeks go to the polls on Sunday for their first plebiscite since the end of their last military dictatorship, investors around the globe feel like they’re trapped in their own personal version of “Groundhog Day” being forever forced to repeat the cycle of hope, greed and fear in regular six month installments.  Small wonder then those more active investors have chosen to separate themselves from the herd and seek out opportunities in funds away from the common run and have done very well for it in 2015.  But even amid the chaos last week, there were noticeable shifts in some of 2015’s major trends, not that you could tell from the strong, positive performance (there wasn’t any) but by who recovered more of their losses.  And while there might be too much blood in the streets for some investors, others might do well to start thinking about whether they should be buying instead of hunkering down.

By the Thursday’s close, intrepid investors helped GREK recover half of Monday’s losses and while there’s much to be said for buying when there’s blood in the streets, the smart money this year has been buying outside the benchmark whenever possible and generally following a specific formula in the process.  As you would expect, fiscal discipline was all the rage among active investors with disciplined nations both within the Eurozone (Ireland) and with their own currency pegged to the Euro (Denmark) being among the biggest winners, although Switzerland continues to be a must have for many investor portfolios.  Among actively managed European equity mutual funds (our ETFG scanner shows no actively managed ETF’s) Henderson European Focus is a good example of this trend with twice the category average allocation to Denmark and Ireland and more than twice the performance of the category in return.  Looking at the three ETF’s representing these single markets: EIRL (Ireland), EDEN (Denmark) and EWL (Switzerland) have all shown a clear trend of outperformance versus a broad Euro-area fund like the iShares MSCI EMU Index (EZU) and all had half the drop of EZU last week.  But the charts of Switzerland have been confusing as the nation was forced to unpeg its currency against the Euro early in 2015, giving opportunistic market timers an opening.

So if financial stability was rewarded for much of 2015 (and especially last week) you can only imagine how the markets treated those more profligate countries following the Greek default.  After leading the broader European funds for much of 2015, the iShares MSCI Italy Fund (EWI) underperformed for the week, down over 5% compared to a 4.66% loss for EZU although at least it wasn’t alone with Spain (EWP) joining it in the down more than 5% club.  But Italy and Spain have more in common this year than just bad performance last week; a quick scan of the leading European or Foreign Large Blend equity funds shows that one common characteristic of 2015’s top performers is a serious underweight towards these two nations in favor of those above but most importantly the United Kingdom.  Henderson European Focus has nearly 37% in the UK compared to 27.5% for the rest of the European-oriented open-ended sector and what helps keep the fund in the top ranks is the same thing pushing the First Trust United Kingdom AlphaDex Fund (FKU) into our behavioral top performers, a focus on smaller-cap names with FKU’s average market cap around $8.5 billion.  FKU also has a nearly 20% weighting towards real estate names and no global market is hotter right now than London’s property market.  For those investors not afraid of buying in the chaos, you might consider planning on a return to “normal” in Europe that could spell better times ahead for those overlooked markets in Southern Europe.

Rotation isn’t a theme that only applies to Europe as here at home a subtle shift of a different kind has been coming over investor portfolios these last several weeks as the severe underperformance by REIT’s begins to abate.  Bank and insurance funds have been climbing the ETFG Behavioral Quant lists (six are now in the top fifty) but success can be a double edged sword and made the funds vulnerable as investors sought to lock-in gains on Greek woes.  That could lead some to put cash to work in the most unloved of sectors but there’s more to the REIT resurgence than simple sector rotation.  Starting with the technical outlook, the iShares Real Estate fund has now outperformed the broader market for three of the last four weeks as the fund’s downward momentum seems to be braking as it closes in on a prior resistance point from last fall at $72.  And while the trailing P/E is still one of the highest among the different sectors of the market right now, REIT’s have a more attractive fundamental role for investors right now as part of the anti-Fed investment strategy.  With each disappointing economic release, prior revision or negative report from China or Greece; investors gain more confidence that a September rate hike might be on hold leading them to seek out the sectors hardest hit by anticipation of future rate hikes.

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