Time to disperse

UK income funds are facing a number of challenges as the year comes to a close: dividend growth is falling, outflows may be limiting their ability to buy into new stocks, and maximiser strategies are now also under greater scrutiny. 

But it’s a potential market rotation that will be of most interest to wealth managers at the moment. At a time when bond proxies increasingly resemble momentum stocks, income funds are more sensitive than most to a changing of the guard. 

So on occasions like September, a month in which unloved shares excelled, the impact on the UK equity income sector is particularly pronounced. 

That’s most obviously the case for strategies such as JOHCM UK Equity Income - still a pretty popular fund with DFMs, according to our database - which is heavily overweight the likes of financials but has next to nothing in bond proxies. The fund was up almost 8 per cent on the month, far ahead of an average 3.4 per cent total return for the sector.

Aside from the growth vs value debate itself, there’s the question of whether late-cycle market moves are increasing dispersion among income strategies. To answer that (in a relatively unrefined manner), we looked at the gaps between the best and worst UK income funds’ monthly performance over the last three years. The results are below:

The chart suggests there has been a slight uptick in dispersion in recent times - the average monthly performance gap has sat at more than 6 percentage points over the past four months. For now, however, April 2017 remains the high point for sector dispersion.

Such calculations are rather crude, admittedly: the gap between best and worst is often down to a handful of outliers rather than an even spread across the performance spectrum. But the figures do suggest the range of returns available to DFMs is starting to creep higher.

A glimpse of light

Eleven years on from 2008, the notion of late-cycle performance is not unreasonably ingrained in investors’ minds. Rising recession risks have added to that suspicion this year: the consensus remains that markets, and economies, are running out of puff once again.

That’s underlined by the caution with which the latest equity market highs are being treated. Per Goldman Sachs, US investor risk appetite is lower than it was a year ago - despite this time last year being characterised by a sharp sell-off. That corresponds with the data available from other surveys: irrational exuberance is still in extremely short supply.

Interestingly, Goldman’s US strategy team also indicate that it’s UK investors who’ve proven particularly glum about the world’s biggest market this year. Whereas Japanese, Europe ex-UK and Middle Eastern investors all made net purchases of US shares and money market funds in the first half of 2018, UK investors withdrew a net $126bn. 

Wealth managers will only be a small fraction of this cohort - and the evidence is they’ve been more reticent to pull back on US exposures - but it’s a statistic worth pondering.

All this said, there are signs of some light at the end of the tunnel. The US yield curve has continued to steepen of late, putting to bed for now the increasingly interminable discussion of what a flat or inverted curve meant in economic terms. And some now think there’s also evidence of a bottoming out in global data. Pictet AM’s chief economist Patrick Zweifel, for example, suggests that global economic activity is at “an inflection point”. There may be some green shoots emerging in the depths of autumn after all.

Standardisation

Research from Boring Money shows just 23 per cent of investors are able to calculate what they pay when presented with charging information on a fund factsheet. 

Our own work last week indicates that this isn’t an issue confined to retail investors: many an adviser client still struggles to compare like with like when it comes to DFMs’ own charges. This latest study presents some potential solutions and suggests “a small amount of understanding is better than none”.

That’s not necessarily the same when it comes to advisers: it’s the granular detail that they’re lacking, rather than a basic understanding. But the underlying point remains the same - there's been little progress on this front in the years since the RDR, the Asset Management Market Study, and Mifid II. The adoption of an explicit, industry-wide set of standards and templates must surely now be considered by regulators and investment firms alike.