If 2020--“a rotten year for people and the economy”, according to François Chauvet, CEO of Fundclass, the qualitative fund rating company that calculates the European Funds Trophy--had not been synonymous with market disasters, 2021 would have been a “smooth bullish year”. 2021 would have been a continuation of the rebound seen from mid-2020. “We broke all the records in a rather unexpected way. For example, in Paris, after the low reached in March 2020, we doubled the stakes. We were at 3,500 points and we went above 7,000 points”. According to Chauvet, 2021 was a very good year. For the markets as well as for managers: “it was impossible to make a mistake”.

Predominance of ‘buy the dips’ strategies

“Given the monetary facilities provided by the central banks, and the fact that money was flowing freely and could not be reinvested either in the short term or in long-term bonds, which yielded nothing, the only solution was to invest in equities,” he continued. “And as there was no great risk in equities because there was precisely this monetary safety net behind them. As soon as there was a downturn in the economy, the market automatically rebounded and rose.”

This market configuration favoured the development of the ‘buy the dips’ strategy. Managers buy at the slightest downward movement knowing that it can only go up. “They got used to the idea that the markets were buoyed by this influx of liquidity and that the risks of it going very low were minimal. So they all went in very long.”

A strategy that seems to be becoming, if not the norm, at least regular occurrence on the Paris market, he said.

This worries Chauvet somewhat. He reports that even since the Ukrainian crisis, many players are continuing with the buy the dips practice, even though the circumstances are now very different and the monetary safety net is not eternal. That is despite the ECB recently announcing that the return to normality of fiscal policies for member states was delayed by the Ukrainian crisis.

Return of volatility in 2022

Of course, we must avoid panic. The year 2022 looks much less smooth for managers, who will have to deal with increased and unusual market volatility. Managers who will have to relearn the long term, according to Chauvet. And if buying on the downside remains a good strategy, they will have to be more selective. For example, by focusing on good companies unfairly punished by these new market conditions.

“Even if 2022 had started on the trajectory of 2021, we noticed a loss of steam. When you’ve beaten all the highs, it’s always hard to top that. People started to think that the trees weren’t going to reach the sky. This turnaround was felt around 10 February. We started to feel that it was beginning to level off. The market entered a consolidation phase. And with Ukraine, the trajectory became bearish.”

While all bets were good in this bullish year, some categories performed better than others. Of the 206 categories in the ranking, 25 had negative performances. This compares to 80 last year.

ESG bias

Among the top performers is the “Leveraged Natural Resources Equity” category, which has a +77.1% year-on-year return. Last year, this same category was the worst performer of 2020 with a negative return of 30.6%. US real estate stocks came in second with a return of 49%. Agricultural commodities complete the podium with an annual return of 40.6%. Those who played the “European bear market” strategy lost 32.8%.

Managers who were exposed to green technology, health and energy transition sectors performed well, benefiting from an appetite for these products. The health and water sectors performed very well.

ESG is creating a bias in the market, noted Chauvet. “Companies that are well rated on ESG criteria or that show good prospects for development will attract more capital flows than others. And their ratings will mechanically improve.”

This year’s list of the best Luxembourg management companies included several regulars: Okoworld, Capital Group, T Rowe Price, MFS Investment Management, Goldman Sachs, Pictet, JP Morgan AM and Flossbach Von Storch. With a special mention for this last fund firm, which, in addition to being the best in its category in Luxembourg, is also the best in Europe.

The full list of winners can be found here.

This article was originally published in French by Paperjam and translated for Delano