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Asset Allocator

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Sell-off reveals new surprises for allocators; Fund favourites hope stars align again

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Drifting apart

It’s an old-fashioned risk-off Monday for markets: the coronavirus buying opportunity has either been pushed back or become more compelling, depending on your perspective.

Allocators will know that days of this kind are part and parcel of investing for the long-term. Still, there are one or two recent indicators that could make them sit up and take notice.

Because while the headlines are filled with equity index falls and haven assets setting records - 30-year US Treasury yields hitting another all-time low; gold at a seven-year high and nearing the $1,700 mark - there are more unusual goings on, too.

The first has to do with gold’s relationship with the US dollar. Though both are seen as haven assets, there still tends to be an inverse correlation between the two. That’s broken down in recent days and weeks as growing worries have seen investors turn to bullion. The tail hasn’t wagged the dog, however: the greenback has continued to power ahead, too.

Interest rate differentials with other major currencies have a part to play here. On top of that, when it comes to other major economies, the travails of Europe and Japan are pretty evident at the moment. For the euro, hardly a haven at the best of times, recent moves aren’t so surprising.

More notably, the yen has seen its haven status called into question in the past couple of weeks. For overseas investors that shun hedged share classes, Japanese equity declines have historically tended to be offset by yen strength - or vice versa. If both start moving in the same direction more consistently, that will give allocators pause for thought. Given the overall performance of the Japanese market of late, and the macro headwinds it faces, the answer may simply be to move away entirely.

Holding on

Wealth managers tasked with guessing the five best-selling funds on platforms last year would probably have done pretty well. Three Vanguard LifeStrategy offerings, Fundsmith Equity, and Lindsell Train constitute the net retail sales winners. 

That last one is, in fact, the firm’s global offering - recent outflows from the UK flagship pushed it down to sixth place - but there’s little surprise otherwise in Fundscape’s headline figures.

Will it be all change in 2020? Fundsmith Equity and Lindsell Train’s UK and global funds are all fourth quartile on a six-month view, though the first two have seen performance improve again this year as investors return to what’s worked over the past decade.

Still, Fundsmith did see a rare month of net outflows in January, according to Morningstar figures. After such a big run up, profit-taking on these portfolios will be front of mind for DFMs and indeed allocators of all stripes.

As the Fundscape figures also highlighted, passives’ market share just kept on growing in the fourth quarter of 2019. That, coupled with the continued resilience of 60/40 portfolios, means there’s little chance of Vanguard dropping down the rankings. And if performance starts to struggle, the cost attractions will likely be enough to keep investors interested.

Active managers who think a prolonged downturn will bring their qualities into sharper focus may realise this is at odds with another of their rules of thumb. Both retail investors and advisers have been told repeatedly that investing for the long-term, and buying the dip, is the way forward. That sentiment has been accepted and internalised by most investors. Those who have embraced the rise of passive allocation strategies are unlikely to be any different.

In the red

When it comes to investment, online forums’ collective buys and sells usually only affect shares at the smaller end of the scale. Last week, however, one particular Reddit group briefly emerged as a potential factor behind some of the more curious market moves of the month.

Another point of interest: as the original FT Alphaville article noted, the power of the (collective) punter may have been strengthened by the rise of commission-free trading in the US.

Similar moves away from such commissions are underway in the UK, even though the investment mindset isn’t as ingrained on these shores. But it’s not just moving markets that’s the issue - other recent evidence suggests the focus should remain on preventing the unsuspecting from causing themselves harm.

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