Rotation, rotation, rotation

Whereas last year investors were looking at growth stocks with a very long horizon, and short-term corporate losses were being brushed aside under the guise of long-term thinking, that sentiment has completely reversed in 2021. Perhaps the best example of this is the Non-Profitable Tech Index created by investment bank Goldman Sachs, an index of – yes, you guessed it – loss-making companies in the technology sector. I have taken the end of December 2019 as the starting point and converted the position on that date back to 100. This index lost more than 25% during the first outbreak of the pandemic, but then began an impressive resurgence. Between March 2020 and February 2021, the index increased fivefold (!) in the space of 11 months. However, the decline since then has been almost as spectacular as the index has now lost 36% in the last three months.

The speed and ferocity of the rotation has wrong-footed many fund managers. Given the above-average performance of growth stocks in 2020, the majority of investors were prepared for a rotation, but it still came as a surprise to many when it actually happened. The chart below compares the performance of investment funds in 2020 and 2021. The results are very similar to those of individual stocks in Figure 1. Many fund managers who did very well in 2020 have so far underperformed the index in 2021 (NB: I belong to this group myself). What is particularly striking, however, is that almost half of the investment funds show an underperformance in both 2020 and 2021. Many fund managers may have been late in making the switch to technology and are now missing out on the rally in traditional segments such as energy and banking.

Almost as striking is the statistic that only 3% of investment funds managed to outsmart the index in both years. A pandemic specifically should be a period in which active management actually proves its added value over passive index tracking. And although many investment funds succeeded in this, it would be a missed opportunity if the value added last year were to be wiped out in 2021!