Swiss Equities: Is Now a Good Time to Invest in Active Funds?

Julian Page, Head of Fund Research, DDQINVEST

The Swiss equities market over the last year has been relatively fruitful in relation to previous years. A number of factors can be attributed to the country’s recent strong performance, including rising dividend yields, a strengthening in financial and healthcare sectors, and a strong US dollar benefiting the vast collection of Swiss equities with overseas interest in the US. The Swiss equities market, however, has taken its time rebounding from the effects of the financial crisis. The Swiss Market Index (SMI) earlier this year reached its highest intraday peak since 2007, highlighting the country’s lethargic process in achieving a feat US benchmarks have been accomplishing with distinct regularity. Notwithstanding the recent relative strength in the SMI, it is important to note the divergence in performance of top performing funds in the sector from the index itself.

The chart above shows the SMI against five of the top performing actively managed Swiss equity funds in the Lipper Global - Equity Swiss sector. It is worth noting that cumulative performance charts can be misleading in reflecting performance given their propensity to positively skew chart data given a short period of very strong performance. Nevertheless, the chart is useful in highlighting the low divergence in cumulative performance between actively managed funds and the SMI up to the start of 2016 and the divergence there on.

Since the beginning of 2016 there has been a trend of outperformance in the actively managed funds over the index. Notably, the divergence in percentage growth between the actively managed funds is growing, suggesting a potential loosening of this highly concentrated market. Discrete performance over 2017 also shows a widening of performance, with the top funds in the sector as highlighted in the chart yielding an average growth of 5% higher than the SMI.

The current majority of fund flows in the Swiss equity market are in the passive sector. Given this trend, along with the outperformance of good actively managed Swiss equity funds over relevant indexes such as the SMI, now could be the right time for investors to exploit opportunities in the active sector and consequently we may see a shift in fund flows from passive strategies to active strategies.