S&P exec warns of "herd" danger in European stocks

By Brian Gorman

LONDON (BestGrowthStock) – A “herd” mentality among European fund managers chasing too few stocks is making their prices vulnerable to a sudden downturn, said the director of fund research at Standard & Poor’s.

Stocks such as drugmakers Sanofi-Aventis (SASY.PA: ) and Novo Nordisk (NOVOb.CO: ) are in “everybody’s portfolio,” said Peter Fuller, presenting S&P’s annual review of the European Funds sector on Monday.

He said uncertainty in markets had led to a flight to the euro zone’s quality companies, especially stronger dividend payers.

“Nobody gets sacked for average performance. Some managers tell us that because they have a diversified portfolio, there is safety in numbers. But this is tosh,” he said. “It’s a treadmill. It only works for a certain period of time.”

Fuller said it would only take a slightly negative piece of bad news or a rumor for the money to move out again, and for such stocks to fall.

“We had a similar situation caused by quant funds in 2008. Their performance was hit 10 percent in a matter of three days, I am not saying this will happen again, but we can see the same bubbles.”

He said the argument over being diversified was “neither here nor there. If you look at it, you have large amounts of money, chasing not only the same sectors, but the same stocks.”

The herd mentality was especially affecting large cap British companies, and was also affecting some midcaps in Europe, he said.

On the market generally, he said: “We’ve had a bounce, and some of the rubbish bounced. It’s not going to bounce again. It’s become a stockpicker’s market by default.”

He said that it had been “too expensive” for fund managers to protect their portfolios, as high volatility had pushed the price of derivative instruments too high.

Fuller pointed to a better outlook on valuations for paper companies and luxury goods makers, but acknowledged that these were not “big index constituents.”

He also mentioned prospects for European telecom companies, but said this was driven by “rumors of mergers.”


Among others, S&P has upgraded the Aviva Investors — European Equity Fund to “AA” from “A,” citing the strength of manager John Botham. “He is a blend manager, combining growth and value, but never wildly either side,” he said.

It has downgraded two Gartmore (GRTR.L: ) funds — European Selected Opportunities and the Continental European Fund — to “AA” from “AAA.” He said it was due to manager John Bennett being new at the house, but stressed that this was not a comment on Bennett as a manager.

“We like John, but we’re just waiting to see how he fits in,” Fuller said.

He said the Oslo-based Odin Europa SMB fund was no longer rated by S&P, having previously been rated at “A,” adding that the fund’s strengths were mostly in the Scandinavia market.

He has also placed two Schroders (SDR.L: ) funds under review following the departure of manager Gary Clarke this month: the ISF European Equity Yield Fund, and the ISF European Equity Alpha Fund.

Investing Research

(Editing by Will Waterman)

S&P exec warns of “herd” danger in European stocks