Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.
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This newsletter was perhaps a little hasty in saying yesterday that no dips were being bought. The bounce for domestic equities has been extended this morning by the Bank of England’s policy loosening measures. But these are still baby steps in the grand scheme of things: few allocators will be truly loading up just yet.
That said, it’s not just diversifiers that have helped out wealth managers’ positioning in recent days. Many of their equity selections, too, have also been top of the class.
That’s because the underlying market dynamics haven’t really shifted. Shares may have done a U-turn, but growth and momentum strategies are still at the head of the pack.
We mentioned on Monday that value strategies had been dealt another blow by the problems facing both resources and financial firms. The other side of that equation is that erstwhile market leaders, like tech stocks, have continued to outperform.
In sterling terms, the Nasdaq has shed 5 per cent since the start of February - compared with an 8.8 per cent slump for the S&P and a 9.6 per cent drop for the Dow. That’s in part because investors unsurprisingly think companies like Netflix will be beneficiaries of populations being forced to stay indoors.
It also has to do with the nature of the sell-off. A V-shaped recovery may increasingly look out of the question, but many allocators’ overall investment theses remain intact. Reducing risk does not, for now, mean abandoning the positions that have served DFMs et al so well over the past few years.
Coming up short
More signs that certain hedge funds and the like are restoring some faith in their capabilities: the FT reports on a number that have made outsized gains in recent weeks. For every fund that’s been betting on lower bond yields, however, there are fund firms that have done the opposite. And so we return to H2O Asset Management.
When the Natixis subsidiary was in the news last summer for the liquidity concerns that affected its MultiBonds strategy, we noted that its MultiReturns strategy - the vehicle with which it’s gained traction among the UK DFM community - wasn’t unduly affected. The same can’t be said, unfortunately, for H2O’s warning this week that clients face “surprisingly large losses” due to bets turning sour.
MultiReturns, to that end, is down 21 per cent year to date, notwithstanding a small bounce yesterday. And that speaks to why many selectors are still wary of the absolute return space, even as the flagship funds start to reassert themselves. Whereas those strategies’ poor performance tended to be spread out over a prolonged period, H2O isn’t the only fund to blow up in the past year.
What’s the reason for this? Liquidity is still holding up well in most parts of the market, in the face of the fierce selling of recent weeks. There are warning signs emerging on this front, too, but a lack of trading action isn’t to blame when it comes to alternative fund woes. Rather it’s a sign that rapid market moves can quickly catch out even those managers who profess to be the most nimble.
Rabbits in hats
This afternoon’s Budget is widely expected to put in place some fiscal stimulus to accompany this morning’s monetary moves from the Bank of England. It will focus on infrastructure and some ameliorative measures for workers, rather than the helicopter money policies being advocated - and now implemented - in some quarters.
From wealth managers’ perspective, the announcement may also be as significant for what it doesn’t say. As usual, pensions tax relief was once again deemed to be on the chopping block in the run-up to the event. The coronavirus outbreak may mean it’s once again saved from the axe.
Other reforms relating to IHT and Aim investment may not be dodged entirely, but - hostage to fortune time - the odds are that they will be put out to consultation rather than introduced immediately. Either way, the need to respond to the burgeoning demand and supply shocks facing the economy mean that recasting the savings system has been pushed back down the political agenda.