Asset AllocatorNov 4 2019

Wealth firms re-examine the latest great rotation; Allocators overhaul UK vs overseas exposure

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Sum of its parts

As November kicks off in earnest, wealth managers will be looking more closely at the market moves of the past two months. The sudden style reversal of early September was followed by a month of healthy gains in October - but much of the real activity was obscured by exchange rate shifts. 

Take Japan, whose stock market has now risen by some 10 per cent over the past two months (right after many DFMs had cut exposures). The benefits of this gain have been obscured more than most by the pound’s recent rise: sterling investors saw just a 2.7 per cent rise in the Topix index instead. 

That masks the fact that value stocks, like those that form a decent chunk of Japanese indices, had a very good October in sum. 

But there’s more than meets the eye on this front, too. Value stocks across the globe still appear to be rising and falling in tandem with developed market government bond yields.

There’s an argument that this relationship is still entirely mechanical rather than one based on a real shift in sentiment. And as SocGen’s reliable Global Equity Market Arithmetic note suggests, these moves have occurred irrespective of value stocks’ fundamental performance.

The investment bank has looked at US third-quarter earnings and found that the best results by far have come from bond proxy stocks. Cyclicals - typically the deep value plays nowadays - have reported particularly poor numbers. 

On one level, this contradiction might suggest there’s little reason for value shares to continue outperforming absent another move higher in bond yields. Yet SocGen highlights another conclusion from this October resilience: it believes, at long last, that “some of the bad news is already priced in” for value stocks. DFMs might well be starting to think something similar.

Going global

While sterling’s rise dampens the returns on offer overseas - and the factors behind that rise make domestic assets look more attractive - discretionaries could be forgiven for scaling back their horizons. But some allocators are still looking further afield for returns as they ready their portfolios for the months ahead.

Beaufort Investment, which recently moved underweight equities for the first time in more than three years, has also shifted its fixed income allocations. The firm has swapped out sterling short duration plays as well as one of its two strategic bond funds run by Janus Henderson. Here’s head of fund research Emma Clarke:

We had sterling strategic bonds which have done very well in recent years. We thought that [sterling performance in general] was coming to an end. We wanted a more global focus and took profits.

In their place, Beaufort has added Pimco Global IG Credit, AQR Aggregate Bond and a local currency EMD offering from Eaton Vance. Beaufort is also among those to have scaled back its number fund holdings of late: it has worked to ensure all positions are “earning their keep”, in Ms Clarke’s words.

At Wise Investments, a firm whose multi-asset portfolios have historically had more of a UK focus, latest changes have also focused on going global. Its equity holdings now have much more of a non-UK slant.

In keeping with the times, many of these new global plays are also positioned for a change in market leadership. Head of investment management Robert Blinkhorn explains:

At the tail end of summer we thought cyclical stuff like industrials and oil and commodities started to look very cheap…so we bought M&G Global Dividend and Invesco Global Opps. We also added to Artemis Global Income.

That has also resulted in the disposal of an existing global offering: Veritas Global Income was sold because its profile was less cyclical than Wise wanted.

Barriers to plenty

A new study from CFA UK echoes the comments we made at the end of last week about fund boutiques: barriers to entry in the retail investment management sector are relatively low, but barriers to success can be considerable. 

And this second roadblock appears to have had an impact on new business activity. Despite the high-profile launches of recent years, CFA UK’s study found that just 47 retail investment firms were authorised by the FCA last year, down from 192 in 2017 and an average of 265 for the previous four years.

In response, the Society suggests competition policy should “focus more on ways to overcome inertia”. But as it also acknowledges, an industry built on scale and track records is unlikely to flock to new businesses without good reason. 

That’s particularly the case when the investment industry as a whole is going through a significant consolidation phase. Structural factors of this kind will continue to have more of a bearing on a firm’s chances of success than any regulation designed to help smaller firms.