M & A activity makes outperformance harder

The increase in merger and acquisition activity across the globe is making it significantly more difficult for fund managers to outperform their respective markets, according to the head of a leading research company.

This recent development has meant fund managers now have to monitor both poorly performing stocks along with solid performers in order to deliver above benchmark returns.

“Fund managers have found it hard to outperform in the last 12 months because they’ve forgotten about the companies they wouldn’t normally invest in and are way underweight in,” van Eyk chief executive Stephen van Eyk said, speaking at a Financial Services Partners conference.

“These are the companies being picked off in this merger and acquisition activity, so now they’re having to watch their underweights very closely as well as the overweights that they think are the really good stocks,” he added.

Van Eyk feels the current market environment is also presenting a challenge for investors, as trying to select a fund manager with strategies to take advantage of this phenomenon is extremely difficult.

“What manager would you pick that would have a position in those stocks that are being taken over?” van Eyk asked.

“You could say that some stocks that have been taken over have gone up in sympathy just in case they were going to get taken over, so I suppose it would be a value strategy, favouring value, lower grade companies. There are some managers who have just got lucky and hit it,” he said.

While many investors would not categorise Qantas in the category of a company van Eyk described, he felt the company’s recent characteristics made it a good match.

“It wasn’t a boomer and Qantas had been trying to outsource bits of its operation, with all of the controversy of having its maintenance done overseas … but if the Government continually steps in and says, ‘No you can’t do that’, the company will actually get taken out,” van Eyk said.