Asset AllocatorDec 3 2019

DFMs go big on MPS modifications; Low-return era changes the equation for fund buyers

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.

Forwarded this email? Sign up here.

Up is the new down

In recent weeks we’ve reported on DFMs scaling down the number of holdings in their portfolios. The trend makes intuitive sense: amid late-cycle uncertainty, it’s natural that wealth managers would want to avoid equivocation and focus on what really works. But across the sector as a whole, things aren't quite so clear cut.

To examine the pattern in more detail, we compared 25 discretionary balanced portfolios as of September 30 with those same portfolios at the start of the year. The results show that scaling back portfolio sizes is far from a unanimous decision - nor is it even a majority decision.

In total, 44 per cent of DFMs have increased the size of their portfolios since the start of the year, with 36 per cent cutting back and the remainder leaving total numbers untouched. The average number of holdings in a balanced model has risen from 24 to 25 over the course of 2019.

Yes, in many cases, the changes - in either direction - amount to tinkering around the edges rather than a concerted shift in portfolio construction. But it’s also true that the most significant moves - wherein discretionaries have changed their number of holdings by five or more - have all occurred in cases where numbers are rising, not falling.

Rather than charting a direct route through market uncertainty, fund buyers may have been seeking to hedge their bets by introducing a wider range of style or regional exposures. 

Still, the findings are notable because the power of the concentrated portfolio has historically held sway over wealth managers as much as fund managers. That’s particularly the case in an era when fund selectors and stock pickers need to differentiate themselves from index trackers. But there’s a growing school of thought which says that concentration doesn’t actually do much by way of adding alpha. The increased focus on liquidity may be helping wealth managers reach the same conclusion.

Taking stock

Back in 2012-13, when Apple’s stock market dominance was at its peak, you couldn’t move for commentators comparing the tech giant’s market cap with the GDP of nations around the world. ‘Apple is now worth more than Switzerland/Singapore/Russia’ went the headlines, in a classic case of confusing stock with flow.

This time around, in a year when Apple shares have soared almost 70 per cent and the company has reclaimed its position as the world’s most valuable, the comparisons are a little more accurate: Apple’s market cap now equates to more than that of all large-cap US energy stocks put together

This, of course, says as much about the latter as it does about the former. And it’s not just range-bound commodity prices that have been doing the damage to the energy sector. Goldman analysts note that carbon-intensive industries are starting to be viewed negatively in and of themselves.

We noted something similar a couple of months ago: there are signs that ESG priorities are really starting to have an impact on share prices. And it’s not just equity markets. Axa IM’s Chris Iggo, analysing the underperformance of energy names in the high-yield bond market, thinks the trend is in part a “justification for more aggressive ESG policies”. He adds:

In a world where traditional metrics of performance are going to be subdued, the ability to demonstrate progress in how we allocate capital towards climate change goals will be super-important. 

Selectors of all stripes - not just those tasked with constructing ESG-friendly portfolios - will be keeping a close eye on how these dynamics affect fund managers’ holdings in the months and years ahead.

Bund blip

The leftwing of Germany’s Social Democratic party has triumphed in leadership elections - and markets are taking it well. The idea is that the junior partner in the country’s grand coalition will now put pressure on Berlin to finally loosen fiscal policy.

Bad for bunds - yields rose yesterday in response - but good for a domestic economy widely seen as requiring a more proactive fiscal policy. That in turn would filter out to the rest of the eurozone, or so the thinking goes.

Yet there’s still, for now, the sense that investors are getting ahead of themselves. The FT suggests it would take a concerted downturn in the Germany economy before fiscal policy attitudes really change. That seems reasonable enough given the longstanding aversion to extra spending. From investors’ perspective, things may need to get worse before they can get better.