Don’t go away in May – European investors want active managers - ISS European Funds Insight - 15 May 2020

The old City expression “Sell in May and go away, don’t come back till St. Leger day” refers to British stockbrokers and bankers taking the summer off and not returning to work until September (St. Leger day refers to an English horse race meeting held annually since 1778). However, market data from around the world, not just in the UK, shows that stock market returns are lower in the Summer months– the S&P 500 has on average returned 2% in each May to October period since 1945, compared to an average 7% gain between November and April. 

As Europeans start returning to work the recovery from the initial Covid-19 shock and adaptation of everyday life makes financial markets difficult to navigate. If one looks at financial markets as a barometer of economic health, they might think the Covid-19 crisis is over - most equity markets have regained the losses they experienced in March. In addition, fiscal and monetary stimulus has disguised the financial health of many businesses that are still finding a way through this crisis. As such European investors have seemingly turned to active managers for professional guidance.

Active outsells passive in April, and so far in May

The first week of May saw European investors allocate €7 billion to mutual funds, this follow a net sales inflow of €18 billion in April. In stark contrast to the U.S., European active funds are proving to be more popular in the Covid-19 recovery than passive products. Active managers saw net sales of €14 billion in April and €6.7 billion in the week ended May 6. Passive funds have seen positive inflows, but at a much lower €3.9 billion in April and €517 million in the week ended May 6.

Figure 1: Sell In May? Not for European Investors (Weekly Data, In Billions of €)

*Data as at May 6th 2020 sourced from ISS MI Simfund.

Sector Breakdown

All three main asset classes saw inflows in the week ended May 6 with fixed income funds most popular in net sales terms. Global bond and equity funds with a focus on blue-chip companies were the best selling in both bond and equity sectors. Emerging market funds were the least popular in both equity and fixed income flavours. Growth funds were most popular within the mixed asset sectors.

*Tables do not add up to 100% due to some sectors being removed.

*Data as at May 6th 2020 sourced from ISS MI Simfund.

Conflicting forces makes investment in 2020 a difficult proposition

As central bank stimulus buoys global equity and bond markets, investors are faced with conflicting views of what they see in markets and what they see in the world around them. Markets may be going up, but so is unemployment. Since interest rates were cut in 2008/09 central bankers have repeatedly told us the global economy is too weak to withstand higher interest rates, indeed many central banks have carried out open market operations at various points in the last 10 years all while financial assets continued to increase in value. With this in mind, it is not surprising that many European investors are looking for professional guidance to navigate what looks to be a difficult recovery.