Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.
Forwarded this email? Sign up here.
Value for money
There’s a risk of over-egging investors’ renewed interest in value investing this quarter. That's because, as allocators head into the final few weeks of the year, it increasingly looks like they’re preparing for holidays rather than rotating aggressively.
The uptick in risk appetite seen in October has been replaced by a more familiar wait-and-see mode this month. Investors are awaiting further news on trade wars, UK politics and the global economy.
Nonetheless, UK wealth managers who are interested in changing investment styles do seem to have more options than in the past. We’ve revisited our analysis from back in February to examine how many equity funds offer a true value tilt for investors.
The chart below shows funds with at least 40 per cent of their holdings in 'value' equities, according to Morningstar:
That works out as about a quarter of each sector, once trackers are excluded. But it's instructive to compare these figures with those produced back in February: the number of funds with a value tilt has risen markedly in several cases. That's most obviously so in Europe. The valuation discount applied to many of the continent's companies this year has had an impact on funds' style profiles.
This metric is only a rough proxy for value funds, as the UK equity income datapoint shows. The sector again scores highly when it comes to value offerings, but recent performance suggests these positions are often outweighed by portfolios' preference for bond proxies.
That's proof, were it needed, that wealth managers still need to take care when assessing value propositions. A year ago this week, we highlighted figures suggesting a significant proportion of equity managers were claiming to offer a blend of investment styles, but in reality simply performing as a growth fund would. That tendency won’t have gone away entirely - but the latest data indicates there are now more viable choices out there for DFMs.
Yielding no ground
It’s bond yields that are driving current global market movements: first the spike seen in September and October, then the relative calm of recent weeks.
That could well continue to be the case next year. M&G’s Jim Leaviss notes in his 2020 outlook that if the bond bubble does burst - and he lists several reasons why such calls may again prove premature - it would have consequences for assets from corporate bonds to equity to property.
Needless to say, the recent uptick in yields has indeed had an impact on a variety of asset classes, including fixed income of all stripes. Take the mainstream investment areas for UK discretionaries: the average fund in the gilt, index-linked gilt, sterling corporate bond, global bond and EM bond sectors has lost money since the start of September.
And yet high-yield bonds - a sector that confounded the doubters again and again since the financial crisis - have outperformed on this occasion, too. The average fund has posted a respectable 0.4 per cent gain over what is, after all, a very short period of time.
Some allocators will think that's reasonable: bonds’ mini sell-off was seemingly triggered by better economic data, which should lend itself to better conditions for junk issuers. But investors will also be aware that the high-yield market is splitting between the haves and have-nots in some areas. Not all active managers will have made the right choices.
There is one other factor behind the good performance. An unusually large proportion of the high-yield sector tends to offer sterling hedged share classes as a default. They’ve prospered as the pound has rallied in recent weeks, just as (unhedged) global and EM bond funds have been hit hard. A safe haven, of sorts, during an unusual period for investors.
Alexander Darwall’s successors at Jupiter, Mark Nichols and Mark Heslop, have wasted no time making a call on their predecessor’s most controversial holding. The pair have sold down Wirecard shares within the Jupiter European funds since taking over last month.
The Germany payments company accounted for more than 8 per cent of the portfolios prior to the ex-Columbia Threadneedle pair’s arrival; figures from FE indicate the majority of the position has since been sold. For now, the rest of the top ten positions remain much as they were.
That leaves Mr Darwall’s investment trust - as of last week run by his new firm Devon Equity Management, and now known simply as the European Opportunities trust - as the principal UK-based holder of Wirecard shares. Some 12 per cent of the portfolio is still held in the stock.
Fund selectors have been retreating from the Jupiter funds since Mr Darwall’s departure was announced. But they've not shifted over to the trust, either: the company has traded on a discount to NAV since the spring. Buyers are seemingly waiting to see how the managers all fare in their new homes - and there's now one big point of differentiation between them.