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After the events of the past few days, there’s an argument that headline findings from Bank of America’s latest fund manager survey, published yesterday, are already out of date. But there are still enough tell-tale signs when it comes to positioning to make the analysis worthwhile.
Given the bullishness of the survey as it stands, DFMs might only wonder at how optimistic fund managers have now become. Because, as of December 12, average cash levels were already at their lowest level since March 2013. Recession risks had been priced out, and growth expectations were well on the up.
Of course, investors had already started to price in events like a Conservative party majority and perhaps even a better outlook for the trade war in 2020. But confirmation of at least one of those hunches may have encouraged more diversification. Managers had already begun to increase allocations to different equity regions, but long US tech/growth stocks was named as the most crowded trade in December.
UK underweights, meanwhile, stood at a net 13 percentage points. That was already much the same as the 1999-2016 average of -10. But the temporary removal of Brexit uncertainty will have brought another bounce. How long that lasts is still to be seen: the pound is now below where it was before last Thursday, but shares have held onto gains thus far.
Look at current factor preferences, however, and a more complex picture emerges. The proportion of managers who think high-dividend yield stocks will beat low-dividend yield shares over the next year rose by 7 percentage points to a net 41 per cent. The proportion who think value will beat growth over the same period fell from 35 per cent to 22 per cent. As 2020 arrives, many allocators are betting on familiar trends to reassert themselves.
A belated line in the sand from Hargreaves Lansdown yesterday, as the company decided to remove M&G Recovery from its Wealth 50 buy list. Long a favourite of the platform’s research team despite consistent underperformance, the fund’s departure arguably says a lot about the state of D2C buy lists at the moment.
Hargreaves has been waiting for almost eight years for the fund’s value process to come good, but the only real sign of that happening was during the style’s short-lived renaissance in 2016. It’s remained firmly fourth quartile in almost every other calendar year since 2012.
The stated catalyst for its eventual removal from the Wealth 50 is reasonable enough: when value returned to favour again this September, the strategy proved unable to capitalise on that shift. Indeed, over the past three months, Recovery remains the third-worst performer in the whole of the UK All Companies sector.
Yet assessing long-term underperformers on D2C buy lists inevitably brings to mind the fate of Woodford Equity Income, and the criticism Hargreaves received for sticking with it until near the point of no return. Recovery has underperformed for much longer than Woodford did, but it seems fair to say the platform was looking for a reason to get rid of the former in light of the controversy around the latter.
Years of consistent yet relatively unremarkable outflows mean that the gating risk for Recovery is no higher than average - unless there happens to be a mass of money still reliant on it maintaining Wealth 50 status. But Hargreaves’ removal note did pointedly comment on the fund’s growing exposure to early-stage, less liquid businesses.
Whatever the rationale, it’s reasonable to think that D2C buy lists are going to have less room to manoeuvre when it comes to high-profile stragglers. Time horizons will be shortened, and attitudes hardened - not necessarily a welcome development, but perhaps an inevitable one in the short-term. The removal of Recovery was more than justified, but it seems unlikely that other laggards will be given anywhere near as long to prove themselves in future.
What goes up
As our opening story today implies, managers and allocators readying their portfolios for 2020 have opted for a light-tough approach as it stands. Few major changes are being made just yet.
It can still be hard to see how the conditions that helped equities flourish over the past decade will undergo a subtle transformation next year. Even when taking into account the shift in dynamics seen in September, few strategists appear to have the arguments for why value will continue to flourish, other than “it’s about time”.
It’s slightly easier to make the case for another long-awaited switch. Analysts have never been short of reasons why the US dollar may be set to underperform in the coming months - and the end of 2019 is no different. A struggling dollar is again becoming something of a consensus bet for next year. As we’ve discussed before, that would have major implications for a host of asset classes. But this trade, more than anything else, is arguably the biggest dog that didn’t bark of the post-crisis era. Dollar slumps have proven shortlived, and rebounds long and consistent. Wealth managers will rightly be suspicious of anything different happening in 2020.