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Bulls on parade
Stay “irrationally bullish”, is the conclusion Bank of America analysts draw from their latest fund manager survey. And in the context of what allocators are doing, this approach looks - to be frank - pretty rational.
That’s because the survey finds a renewed faith in the power of deflation, despite most respondents being confident there’s no end in sight for easy monetary policy. Growth expectations have also halved - a net 18 per cent think the global economy will be stronger not weaker over the next 12 months, down from 36 per cent in January.
As we’ve discussed ourselves, these twin beliefs have reinforced existing mindsets. That means buying more deflationary assets, like US tech, bonds and the like. And the proportion who think growth will outperform value over the next year has now reached its highest level since 2008.
In fact, so much confidence has been placed in existing convictions that average cash levels have fallen further. Cash weightings dropped from 4.2 to 4 per cent on the month, and now sit at the lowest level in almost seven years.
So the music keeps playing, and investors are happy to keep dancing. And at this point, virtually 11 years on from the market bottom, managers think it might take something truly dramatic to finally kick inflation into gear.
Asked what would likely increase inflation expectations, 26 per cent said the implementation of MMT policies, and 24 per cent said a G7-wide commitment to infrastructure spending. Neither appears particularly likely; the 18 per cent who pointed to the election of a progressive liberal in the US perhaps have more chance of confronting this prospect. From the perspective of the average DFM, increasingly wondering how to play their hand, the relative serenity will be welcome for as long as it lasts.
The latest FCA rules sweeping the funds industry mean the concept of value for money is fast taking on a more prescriptive meaning. But for DFMs the phase evokes an old dilemma that applies to both risk assets and ballast: finding attractive assets that won’t cost an arm and a leg after years of buoyant markets.
So while fund selection shifts are still at relatively low levels across the industry as a whole, the search for that something special is leading some portfolio managers to newer pastures. That’s the case for PortfolioMetrix, where a review of fund holdings and allocations has resulted in a foray into the listed infrastructure space. Here’s UK head of investments Nic Spicer:
After Q3 we had a look at portfolios [...] we decided to look at what was performing well but wasn’t horribly expensive and would give us more well-rounded portfolios.
The team has opted to initiate an allocation using the M&G Global Listed Infrastructure fund, mainly for its focus on quality, long-term cash flows “with an element of extra growth”. But like some other wealth firms, the logistics of holding investment trusts have prevented the team from considering a closed-ended infrastructure approach.
Elsewhere, they have also joined others in upping UK allocations, with equity income and small caps once more on the agenda - in this case via additions to Man GLG Income and Gresham House UK Micro Cap. Emerging market and European allocations have drifted back slightly, with manager moves affecting the selection process for the latter.
The PortfolioMetrix team sold out of Jupiter European last year. Mr Spicer says this had less to do with the new management team itself, and more the visibility of their track record.
“Interactions with [Alexander] Darwall’s replacement were very good, but there was less detail [on that front],” he notes.
Fund managers may think a Herculean effort is required to spark inflation globally, but things might prove a little simpler in the UK. Something in the way of fiscal stimulus is still expected in next month’s Budget, and CPI inflation rose by more than expected this morning.
This was, admittedly, the first rise in six months, and follows a three-year low. But a change of course, however brief, always gets investors thinking of alternative scenarios. And the news has been accompanied today by more reminders that the shape of the UK economy, and its workforce, are going to change dramatically in the years ahead.
As it stands, today’s price data will not materially move the dial, for either the Bank of England or allocators. But it may not require radical thinking to bring inflationary pressures back to these shores before too long.