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Impact Investing

IPE special report May 2018

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Sensitivity of selected European equity funds to macro factors

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Overview

The data shows the sensitivity of European equity funds to changes in a selection of macroeconomic factors: European default spreads, European term spreads, European interest rates and European inflation. The higher the sensitivity, the higher the probability that the performance of the funds will respond to changes in the selected factors. The top charts show the sensitivity of the funds to the factors, while the bottom charts show the monthly movements of the factors over the past five years. IPE and PureGroup chose the five largest actively managed European equity funds, in terms of assets, from the Morningstar database. The asset values are expressed in euro.

Sensitivity of European equity products to macroeconomic factors

1. European default spreads – uses a composite of European BBB–AAA corporate bonds as an index to represent European default spread trends. The chart shows that JP Morgan Asset Management, Allianz Global Investors and Invesco have maintained a positive sensitivity in the past five years compared with the neutral to slight negative positioning of UBS Global Asset Management and MFS. Importantly, there has been relative persistence in cohort positioning, with JP Morgan being the most positively sensitive fund to increasing default spreads with Allianz and Invesco closely aligned, as well as MFS and UBS.

2. European term spreads – uses a European long-term sovereign bond index yield minus the equivalent short-term sovereign bond index yield as an index to represent global term spread trends. The chart shows that, with the exception of JP Morgan, the cohort is positioned either side of neutral over the time period, with Allianz and Invesco with a similar small negative sensitivity to European term spreads, meaning that they will have a positive contribution to their performance when the European term spreads contracts. UBS has an equivalent small positive sensitivity, meaning that it will have a positive contribution to its performance when European term spreads expand. JP Morgan is the differentiated fund to this factor with a higher negative sensitivity, and would therefore have had a greater contribution to performance identified by this factor during periods of contracting European term spreads. 

3. European interest rates – uses a composite short-term European bond yield as an index to represent European interest rate trends. The chart shows that all of the cohort has maintained a negative sensitivity to European interest rates, meaning that they will have a positive contribution to their performance in declining rate cycles and conversely negatively impacted in rate rising cycles. In the past 12 months there has been a consolidation of the range, with JP Morgan and Allianz with the most negative sensitivity, and UBS, MFS and Invesco with a more neutral position.

4. European inflation – uses European CPI as an index to represent European inflation trends. The chart shows that Invesco, MFS and Allianz have maintained a positive sensitivity to increases to European inflation over the five-year period, with Invesco maintaining the highest sensitivity. JP Morgan and UBS have had periods of negative sensitivity over the time period and would have generated positive contribution to performance during the deflationary period from 2013. UBS is the only fund to have a negative sensitivity to European inflation. 

Sensitivity to European default spreads

Source for all data: PureGroup

Sensitivity to European term spreads

Source for all data: PureGroup

Sensitivity to European interest rates

Source for all data: PureGroup

Sensitivity to European inflation

Source for all data: PureGroup

About the model

PureGroup’s Forward Perspective Model is a macroeconomic factor model covering open-ended, closed-end and exchanged-traded products. 

The macroeconomic correlation modelling that drives the methodology was developed with US-based academics and Parala Capital, founded by Professors Russ Wermers, Allan Timmermann and Steven Goldin. The model was developed based on their published papers in the Journal of Financial Economics in 2006 and 2013*.

The model provides a unified approach to looking at open-ended, closed-ended exchange-traded products and captures over 8,000 investment products and additional share classes across major asset types.

The approach provides a basis for interpreting the relationship between an investment and wider economic movements. The model analyses an investment product’s positioning to leading economic factors. In addition, the unified model allows for peer group assessment in an efficient and repeatable manner. 

*puregroup.io/academic-research

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