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As the UK ponders, once again, how best to answer the European question, allocators have some thinking of their own to do at the end of 2019. European allocations have been on the out so far this year, but there are signs that’s starting to change.
We’ve documented the gradual decline in European equity weighting over recent months. But we’ve said less about how these shifts - which do now appear to be at an end - have affected individual fund selections.
Below is a chart of the most popular European funds in our database. For comparison purposes, here’s how the same chart looked a year ago:
It’s clear that European shares’ fall from favour hasn’t been accompanied by a shift in strategy among DFMs. Selectors have largely been content to pare existing positions, rather than sell out entirely.
That said, the departures of high-profile managers at Neptune and Jupiter have presented holders with a convenient way of divesting - though the latter still has plenty of residual interest for now.
The leader of the pack remains BlackRock European Dynamic. Not a single wealth manager has sold out of the portfolio over the past year. That may be partly because discretionaries worry about being to get back in if the fund’s capacity constraints were to return. But a more compelling reason is its return to the top of the performance charts. Having been hurt by its allocation to industrials in the past, the strategy has returned to form this year.
The same asset manager’s equity income offering also remains popular, not least because of the healthy 4.3 per cent yield it currently offers.
But it’s growth funds that continue to rule the roost, with two income funds falling out of the top ten to be replaced by Man GLG and Threadneedle. Passive funds also have a more prominent showing this time. The question for DFMs is whether these choices, most of which have served them well in absolute and relative terms this year, will also fit the bill for what could prove a very different year ahead.
For more proof that investors are all facing the same direction at the moment - and an indication of why events like the recent momentum reversal can prove so significant - look no further than data from Bank of America Merrill Lynch.
Not to be outdone by the raft of competitors pumping out 2020 forecasts, Baml yesterday produced 29 separate market outlook papers of its own. But it's a different piece of analysis that contains the killer stat: a recent chart showing that the overlap between hedge fund and US mutual fund holdings has hit a record high this year.
So although some DFMs are looking to diversify their US equity exposure, strength in numbers remains the order of the day for most investors. That’s equally evident from other pieces of data, like that highlighting just how many stocks have been trading at 52-week lows despite the ongoing grind higher.
What, then, of the year ahead? From Baml’s point of view, it’s relatively good news. The general conclusion of those 29 outlooks is that a cessation of trade war hostilities will mean the party continues for a while longer - albeit with a rotation away from the US to other regions, a better time of it for value stocks at the expense of momentum plays, and a weaker US dollar.
There's little sense of contrarianism here. The 'rest versus the US' theme is already a consensus view in analyst world; the others are high on investors' wishlists.
At the moment, however, the crowding around a select group of stocks hasn’t taken into account these possibilities. In the main, investors are still preferring to stick with what they know rather than reallocate elsewhere or take the plunge on different styles. If the safety in numbers mindset holds, the odds are that rotations will happen all at once - or simply not at all.
Vanguard doesn’t get everything right: this week it apologised to investors for the delays in launching a self-invested personal pension product on its own platform. It also launched another active fund, in a bid to bolster a part of its business that’s remained relatively underwhelming in the UK thus far.
Be that as it may, wealth managers happy to take advantage of the providers’ low fees will also remain wary of the prospect of disintermediation. Vanguard’s Sipp will allow investors to access more than 70 different funds on its platform - all Vanguard’s own products. But the launch, now expected for early 2020, might also bring the prospect of the provider selling third-party funds a step closer.
That’s unlikely to happen for a good while yet. And wealth firms have, after all, already survived the emergence of one D2C behemoth over the past two decade. But in more cost conscious times, a truly low-cost way of investing would present plenty of challenges of its own.