Runners and riders

Two weeks into a new decade and the echoes of 2019 are ringing loud and clear. The threat of war notwithstanding, an eerie calm in markets and fresh highs in US indices mean DFMs are witnessing some familiar sights from the previous 12 months. But a new year is likely to require different thinking.

So to our latest assessment of fund firms’ asset class views. The results, summarised in the chart below, give a sense of the prevailing mindset at the turn of the year.

It’s first worth recalling how firms were positioned late last year, as asset managers backed away from the US and EM equities but warmed towards the UK, Japan and Europe.

An easing of the US/China trade war now appears to have presented fund firms with some clear winners and losers. While asset managers are marginally more upbeat about the US, they are much more bullish on Asia than before. Just a quarter are negative on the region, down from a full two thirds of our sample last time. The view on EM equity also appears to have brightened considerably.

Small deviations are on show elsewhere: fund managers are slightly more upbeat about the UK, but have only grown gloomier on European allocations. But it’s Japan turning the most heads when it comes to risk assets: 70 per cent of firms are now positive on the region, up from less than half in our last assessment.

If risk appetite is running high again, there are two clear losers. Government bonds are once more out of favour, with some two thirds negative on the asset class. The outlook is even worse for investment grade credit, where not a single team can now muster a positive view.

But if fund managers are taking profits in defensive bonds, most remain happy to run winners in punchier parts of the market. EMD has only seen its popularity marginally lessen, despite the big gains of 2019.

Ins and outs

The latest fund flow data suggests it’s not just asset managers feeling bullish lately – with caveats.

Investors put a net £530m into equity funds in November, the third highest amount recorded so far in an uneasy 2019. With low valuations raising eyebrows, Japanese equity funds did well while UK equity funds enjoyed another month in the black amid a partial clearing of Brexit clouds. As in October, investors remained happy to back exposure to a buoyant US market.

Bond funds took the brunt of the shift, with fixed income sales amounting to a net £138m inflow. This comes in a year when strategic bonds alone have notched up two separate months of £1bn-plus inflows.

But investors are far from gung-ho. Much of the money went not to equities but a more nuanced approach: multi-asset funds took on nearly £1.3bn as investors looked for risk with some ballast.

If the interest in multi-asset approaches might also feed into demand for DFM services, wealth managers have shown less enthusiasm than other parties. Discretionaries withdrew a net £669m from funds in November, putting them at odds with optimism seen elsewhere. D2C investors ended an 18-month streak of withdrawals, while the likes of advisers accounted for a £1bn net inflow.

Some of the discretionary outflows may well be down to unloved sectors remaining out of favour with the wealth crowd. Absolute return funds endured another month of hefty outflows: they, like the Europe ex UK sector, have not seen a single month of net inflows in 2019 so far. Elsewhere the UK Direct Property sector maintained its recent rate of decline, with an unspectacular £150m net outflow belying the gating on the horizon.

Nitty gritty

In the UK, 2020 has begun just as the last year ended: with sterling falling. Having already erased its post-election gains at the back end of 2019, the currency has continued to slip against the US dollar so far this year. But it’s not as simple as the usual Brexit to and fro in currency markets.

As the FT reports, shifts in economic fundamentals and any resulting moves in monetary policy are back under scrutiny following years dominated by politics. The latest falls come as some monetary policy committee members consider cutting rates, absent an improvement in economic data.

As with the long road to Brexit, it means DFMs backing domestic equities will need both patience and a nuanced approach, if it also throws up opportunities. We’ll be looking closer at how stances on the home market have shifted in the coming weeks.