The search for value

As far as career-threatening asset allocation decisions go, moving into value has been second only to shunning the US in recent years. The thinking might be right but the long-awaited rotation has been slow in coming.

Choppier markets have brought renewed hope (yet again) for value enthusiasts. But there are other challenges to face even if they're right. As we noted last year, plenty of strategies that claim to target value are simply growth funds in disguise.

So we’ve used Morningstar data to examine just how much value exposure is on offer in the main fund sectors. The chart below shows the prevalence of funds that have at least 40 per cent of assets in what the data provider defines as value stocks.

As the chart shows, value fund selectors don't have that big a pool to dip into. Just a sliver of European funds pay much attention to the style, while US and Global funds are also tilted heavily towards growth stocks.

DFMs looking for a bargain closer to home have an easier life: a third of UK All Companies funds have at least 40 per cent in value. UK equity income has a much larger representation due to the growing crossover between dividend and value selections.

Are wealth firms interested? Our second chart suggests DFMs are throwing some weight behind the biggest value names.

The most value-heavy funds make up a quarter of picks when it comes to UK growth selections, for example. That's partly due to the enduring attraction of special situations funds - but, as if to prove the point, the most popular of these (Liontrust Special Sits) isn't a value strategy and so isn't accounted for by the below data.

Similarly, interest in recovery funds helps boost the global equity statistics. But all in all, value investing is still a minority pursuit among discretionaries. Some are still awaiting more evidence; others may simply have been burned too many times before.

Data difficulties

Friday’s better-than-expected batch of US data brought with it some complications for asset allocators: it’s harder than ever to work out if good news is good news, good news is bad news, or somewhere inbetween. 

Because while fears about a US slowdown were allayed by manufacturing figures and non-farm payrolls that showed little ill effects from the government shutdown, the data also prised open a door the Fed had slammed shut earlier in the week.

The central bank’s U-turn on rates had helped justify allocators’ 2019 positioning: many have been betting on lower Treasury yields, a weaker dollar and a better year for emerging markets. But Friday’s figures renewed the debate over whether the Fed might need to hike again this year.

As ever, there’s an alternative view: the continued falls in the unemployment rate suggest there’s much more slack in the US economy than previously thought, meaning the hiking cycle may be too far advanced already. The continued absence of inflation would support this theory. But market moves are still predicated on the ‘better data means tighter monetary policy’ tradition.

Either way, it’s unlikely there will be any more hikes for the next few months at least. An additional question for wealth managers and their ilk is whether this cessation will be enough to override the prospect of a difficult earnings season. 

Analysts now expect Q1 to produce the first year-on-year decline in earnings since the second quarter of 2016. Part of that is due to the tax-cut boost seen last year, but margin compression is also a factor. That could spell good news for those backing the emergence of a stockpicker’s market - or the lack of rate rise pressure may mean a rising tide helps all boats once more.

Making way for Mifid

The coming weeks are important ones for the wealth management industry, Mifid II rules meaning firms must provide granular detail on charging structures after a year of negative returns. 

And asset managers have provided early evidence of how not to do things, according to a Times report suggesting 48 providers are being investigated by the FCA to see whether they're complying with the demand for greater transparency.

The watchdog is still taking a moderate approach for now - it says it isn’t seeking enforcement action, in line with its previous statements suggesting firms would be given time to get their ducks in line. By the same token, this is a sign it isn’t giving providers free rein. Laissez faire but not carte blanche, if you will.

And other consequences of Mifid II are also continuing to put noses out of joint. Research from Peel Hunt says two in five companies and almost two-thirds of investors feel the regulation has had a negative impact on small and mid-cap liquidity as analyst coverage declines. The opportunity set has got smaller for those without the resource to compensate - and asset allocators, themselves wary of liquidity issues, may not feel inclined to step into the breach.