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Wealth firms' long/short quandary as fears jump; A consensus bet under pressure

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Equities exposed

Wealth and fund managers can hardly be blamed for failing to see the Coronavirus coming. But at the same time, they shouldn't have been complacent: it’s reasonable to have concluded late last year that markets were too quiet for comfort.

Subdued volatility has been a feature of the past decade, but the S&P 500’s 71-day streak without a 1 per cent move in either direction was a red flag in and of itself. That run ended yesterday as concerns over the spread of the virus rose. Predicting the ultimate extent of infection numbers is all but impossible. But what can’t be denied is that China is shutting down ever-increasing swathes of its economy as a precaution. At this point, a negative economic impact of some kind looks guaranteed.

All of which is a rather longwinded introduction to our latest analysis of DFMs’ long/short fund favourites. The chart below shows that most were happy enough to buy into Q4’s relative serenity: not for the first time, almost all of the most popular long/short equity strategies increased their net long exposure over the quarter:

 

That being said, most of these changes were relatively minor: more a case of sticking to the holding pattern rather than backing the nascent sector rotation. 

Similarly, increases in gross exposure weren’t as widespread as the above figures might imply. Of the 11 who definitively upped their net positions, four cut back on gross exposures - a sign that confidence wasn’t exactly booming. 

Nonetheless, as investors begin 2020 by contending with a new uncertainty, it’s worth noting that these Q4 shifts meant just one fund was net short at the start of the year - Jupiter Absolute Return. Another, Man GLG UK Absolute Value, has a neutral position. But the majority are still looking forward with a degree of optimism.

Orderly retreat

The latest worries have, at least, brought a sense of order to markets - in that various assets are once again moving as you’d expect. The yen has risen and stocks have fallen. As havens return to fashion, the dollar, too, has been on the up against most currencies

That is of course contrary to the consensus prediction made at the end of 2019. Backing a weaker dollar this year was the favoured trade for many - even if such recommendations have been second only to ‘short government bonds’ in their inaccuracy in recent years.

It’s far too soon to say whether those predictions will be inaccurate again this year. But if the coronavirus concerns do prove relatively brief, another recent dynamic may ultimately be of more interest. The year began with worries about the confrontation between the US and Iran - and in this particular risk-off episode, the dollar didn’t exactly move as predicted

In short, the greenback stayed still when the crisis flared up, and rose when those worries receded. Some investors think the currency’s prolonged rise - and the relative attraction of higher US interest rates for those holding currencies - mean it’s more akin to a risk asset than a safe haven at times.

The end of January has put paid to those theories for now. The proportion of investors who think the dollar is overvalued is at its highest level in 18 years, according to BofA Global Research. But that doesn’t mean they can predict what’s going to happen next.  

Trust in me

Alexander Darwall has resurfaced at his new home, and apologised for holding “too much” of his portfolio in Wirecard. In the case of his investment trust, now with him at Devon Equity Management, this position topped 15 per cent at one point.

Wirecard shares, of course, suffered a tough 2019 after questions were raised over its accounting practices. But Mr Darwall continues to hold 10 per cent of the Euro Opps trust in the company - he’s still backing the payments processor to flourish. That now differentiates him from almost every other stockpicker in the UK market. 

Investors are perfectly happy with that state of affairs as it stands: the trust remains the most popular European equity offering on a discount to NAV basis. And after a mixed 2019, the portfolio has already risen some 9.4 per cent this year - more than virtually any other fund or trust across the entire UK investment universe. Right now, many will deem the apology to be more or less unnecessary.

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