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A lengthy period of low interest and inflation rates and little stock market volatility now seems to be ending. – That's not negative for actively managed global funds, says Stig Tønder, the manager of Delphi Global.
Although the low-interest-rate period has been positive for most people's private economy, it has also made it difficult for managers of actively managed funds to create excess return. Especially in broad markets, such as the European and global ones. Delphi Funds has done better than many other fund managers during the past five years, greatly due to its robust management concept. Nonetheless, the broadest funds have not achieved as good results as they did before.
First of all, why have low interest rates been challenging?
– The central banks' interference in the financial markets has led to capital being wrongly allocated. An example of this is the money that has been channelled into a non-productive sector like real estate, while as regards the stock market it has led to high capital flows to large, slow-growth dividend companies – much through index funds and some factor strategies. Such companies have often been seen as an alternative to interest-rate investments due to their stable earnings and dividends. Following a long upturn, these companies now appear expensive. Their present value is falling due to the rising discount rate, and that is not good news for their share prices.
Why are interest rates and inflation expectations rising?
– The answer to this primarily lies in the US economy. The available capacity in the economy has fallen to a level where, for instance, wages have started to rise. This has caused the US central bank (Fed) to increase the short-term interest rates. In addition, the Fed has terminated its measures to stimulate the economy and instead started to reduce the volume of money supply by not rolling interest-bearing securities they have purchased when these fall due, and this has raised the long-term interest rates. The government's need to borrow more money and lower levels of liquidity in the bond market have also contributed to this rise.
– At the same time, Trump's policy of reducing taxes and increasing tariff walls and the likelihood of larger infrastructure investments are helping to create higher inflation expectations. The rise in the US national debt as a result of the increased budget deficit also raises the risk premiums for lending money to the US government.
And this is an advantage for actively managed funds?
– As long as things don't spin out of control and we see a gradual normalisation, we believe these changes are beneficial for those parts of the stock market to which managers of actively managed funds are usually drawn. Active managers are dependent on rational markets, where the money goes where the risk, growth and return conditions are best, and not where the central banks are in reality directing capital.
The stock markets have risen a lot over the past few years. What are your thoughts on today's pricing?
– Share prices are at the high end, but we can't see any strong over-pricing that may trigger a sharp fall. At the same time, we see that prices are high due to index-heavy companies having experienced a strong inflow of capital. If we remove the largest companies in the USA, the prices appear far more moderate.
How does political risk affect the stock markets?
– The stock markets have to a large extent learned to live with political risk, although there is some noise and volatility at times. Trump has been a risk factor for a long time, but at the same time tax cuts and infrastructure investments are appreciated. Trump's threats of a trade war are perhaps the greatest concern right now, although a really large trade war appears rather unlikely.
Finally, do any sectors and topics stand out in the portfolio?
– Health, IT and finance are three sectors that are doing very well. All have experienced robust growth, have long-term value drivers and are reasonably priced. Solar and wind power are also important topics in the portfolio. The solar power sector has done particularly well this past year and provided a clear contribution to the fund's return.
– Otherwise, the portfolio has a good mix of cyclical companies in the commodity and manufacturing industry sectors, among others, and a significant portion of non-cyclical companies in, for instance, the health sector. The latter is one of the fund's biggest sectors. I can also add that the portfolio's cyclical part includes many late-cycle companies.
Here you can read more about Delphi Global