New breed of bond funds struggle to keep pace; Wealth firms shun discounts despite bargain hunt
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Sustaining the pace
Many thought 2020 would be the year in which ESG cemented its status as the future of active management. And so far, that theory isn’t too far off track. The market trends that helped fuel the sector’s rise to prominence remain in place even as orthodoxy is upended elsewhere.
The recent performance of ESG equity offerings confirms as much. A sizeable majority of such funds have posted returns that are above average in their respective sectors over the past month.
Much of this has to do with the trends we touched upon yesterday. Tech stocks are still in the ascendancy, and value investing is firmly out of favour. Add to that the collapse in the oil price and another surge in interest for utilities shares, and it looks a pretty potent recipe for sustainable investors.
By now, wealth managers will be well versed in the importance of looking under the bonnet of ESG or sustainable strategies - and conscious of the fact that what they find there can often look rather unusual. But investment moves amid a pandemic tend to dispense with the finer points of due diligence. For equity funds, the trends described above have been strong enough to lift all ESG boats in the short-term.
It’s not quite so rosy in every asset class. Several fixed income portfolios held by wealth managers’ ESG portfolios have seen relative performance fall away in March. And the reasons for may well have much to do with the relative infancy of ESG fixed income as an asset class.
Many green bonds are less liquid than their peers; that's clearly a quality that’s been punished in recent weeks. And for those funds that seek out more established businesses, the sector of choice is often financials rather than something more recognisably “sustainable” in nature. This, similarly, has not been a helpful area in which to fish this month.
Some options, like Royal London Sustainable Managed Income, have weathered the period well. But they remain the exception rather than the rule when it comes to bond funds.
Bargain hunt
Daily index moves of six, seven, eight and now even nine per cent do little to lessen the impact of some of the statistics now emerging across the industry. In the investment trust world, for instance, the sector average discount to NAV stood at 22 per cent last Friday, according to Winterflood - a level not seen since the financial crisis.
A slightly different calculation, calculated by Interactive Investor using AIC data for individual trusts rather than sectors, put the average discount at levels beyond those reached in 2008.
The rally seen this week has pushed Winterflood’s figure to a mere 15 per cent. But that remains wider than at any point over the past decade, and is a rapid turnaround from last December, when the typical trust was on a premium.
It suggests there are still plenty of bargains to be had for those willing to dip their toe in the water. But a point regarding yesterday’s rally is worth emphasising: it wasn’t just high-beta trusts that came rocketing back. The sectors that enjoyed the greatest narrowing of discounts were Infrastructure (-14 per cent to -3.4 per cent) and Renewable Energy Infrastructure (-9 per cent to -0.3 per cent).
That’s because these two sectors have seen discounts widen much more than most this year, having traded on sizeable premiums not too long ago. Equity-focused trusts, by contrast, haven’t seen discounts widen that much in the grand scheme of things.
Wealth managers likely have a role to play here, having piled into alternative trusts in recent years while largely sticking to open-ended exposure when it comes to equities. So it may be that profit taking in these alternative areas is much more pronounced than in conventional asset classes.
Numis said the other day that open-ended equity funds had seen little in the way of outflows. That may be true - but in the trust world, per Winterflood, extreme share price swings “reflect selling from retail investors and ETFs, while wealth managers and institutions appear not to be in a hurry to catch a falling knife”.
Another leg down
Sterling’s renewed slump in March has done little to lift the gloom for fund selectors. The pound has recovered a little this week, having lost more than 10 per cent of its value against the dollar alone since the start of March, but remains well below the $1.20 mark.
Either way, the benefit for global funds is tougher to identify than it was at the time of sterling’s last major slump in 2016 - even though its fall against the euro is more severe on this occasion.
The average global, US or European equity fund is now 10 percentage points ahead of its UK equivalent over the past month - but that still equates to a typical loss of almost per cent. Indeed, what’s most striking is the uniformity: the three sectors have each averaged a loss of 18 per cent over the period. Only Japan, where an even stronger yen has provided an even bigger currency boost, differs notably. The average fund is down by a relatively respectable 9 per cent.
