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Asset Allocator

from Asset Allocator

A new millennium bug and the UK's comeback kid

Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs. We know you're bombarded with information, so each day we'll be sifting through the mass to bring you what you need to know, backed up by exclusive data and research. 


An old problem resurfaces for stockpickers

You wouldn't know it from the wider context, but the Q3 earnings season hasn't actually been that bad. The problem, irrespective of company guidance, is that more and more investors are concerned about what lies ahead - and evidence that these worries are justified isn't hard to find.

That shaky sentiment has already claimed a few victims. Those who once grumbled about QE-era markets ignoring fundamentals are now getting what they wished for: recent earnings misses, when they have emerged, have been harshly punished by investors.

As we'll hear often in times of volatility, problems such as peaking earnings do provide a backdrop against which active managers, and DFMs with direct equity holdings, can thrive. But that involves picking winners, and the pool of candidates is diminishing rapidly.

As of last week, outperforming stocks were thin on the ground. The FT noted that, of the FTSE All-World benchmark's 3,211 members, only 853 were still in positive territory (in dollar terms) for 2018. More than half had reached the 10 per cent correction point.

This narrowing pool of outperformance is also illustrated in the chart below, which shows the return of a problem last seen in the late 1990s:


The chart shows the percentage of stocks from the FTSE World index that went on to beat the benchmark over the next 12 months. In the year to 7 September 2018, just 34 per cent outperformed the broader market. A percentage that low hasn't been seen since the early 2000s.

With the market giving short shrift to less than stellar earnings, names once seen as solid are vulnerable to a sell-off of their own. All the more so if these are effectively momentum stocks - Amazon, which fell another 6 per cent yesterday, has now been punished twice over for reporting patchy earnings on Friday. That means one of 2018's standouts is now down almost 25 per cent in a month.

As the chart shows, the last time this trend took hold it was followed by a sharp (albeit short-lived) rally for most of the market. Stock pickers will be hoping this latest millennium bug is as much of a mirage as the last.

BP an unlikely source of solace

To continue the theme above, the number of FTSE 100 stocks to have outperformed the benchmark over the 12 months to yesterday is, coincidentally, 34 – the same as the percentage of FTSE World stocks that were outperforming as of the latest point on the chart.

One of those is BP, which is near the top of the leaderboard again this morning, courtesy of a 3.5 per cent rise on much better than expected third-quarter results. 

An upwards move in the oil price doesn't always coincide with better fortunes for the oil majors, but that's what's happened this year. Even prior to today, BP shares were up 7.9 per cent over the past 12 months, putting the company among the top 20 performers in the large-cap index.

After years of relative struggle, the company has also displayed a sliver of resilience over the past month, despite the familiar sight of a wider slump in sentiment taking its toll on the commodity complex. 

BP shed 10 per cent over this period, but that was still good enough to put it in the middle of the pack, FTSE-100 wise. This morning's effort casts it in an even better light - to the pleasure of UK equity teams at Majedie, JOHCM, Jupiter and Lazard, as well as M&G's Tom Dobell, all of whom are backing the shares in a big way.

But memories of past drawdowns linger on for most wealth managers. Few are willing to increase their dedicated commodities exposure - though there are signs here and there. Psigma and 7IM are among those to have added to the sector since the summer, albeit cautiously. And uncertainty over future market direction means it's ETFs that are the order of the day here - allowing for tactical positions to be shifted relatively quickly if need be.

Budget brings 'patient capital' warning

For investment managers, it became clear long ago that the Budget of 2014 long ago would be the defining red-briefcase announcement of the post-crisis era. 

The pension freedoms unveiled then continue to have significant effects on the business being enjoyed by wealth managers and DFMs. But other Budgets, Autumn Statements, Spring Statements and emergency spending reviews since 2008 have passed by with much less incident for the sector.

That was always likely to be the case for yesterday's affair, too, given the EU withdrawal date is now just around the corner. That said, one of Monday's most cursory announcements may ultimately indicate a different kind of challenge for wealth managers.

For the second year running, the government touched upon the subject of 'patient capital' - clearly a phrase that policymakers as well as high-profile fund managers think worthy of attention. This year they're looking at ways for pension funds to get involved with this type of investment - shorthand for venture capital and the like.

In itself, there's little for DFMs to concern themselves with here. At best, they might ultimately have to consider second-order effects: the proposals are firmly centred on the pensions sector, rather than retail funds. But the sight of an FCA discussion paper on, again, 'patient capital' might concentrate a few minds. 

So far, discretionaries have largely avoided the kind of scrutiny given to asset managers and advisers over the past few years. The FCA has, however, accused wealth managers of being partially to blame for the flight from property funds in 2016 - a move it sees as short-termist behaviour. As the focus on long-term investment increases, tactical asset allocation - and its consequences - may come to be scrutinised more and more by the regulator.

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