Allocators' Wile E. Coyote moment; Absolute return bonds struggle to stand out
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Hope that kills you?
What a difference a week or two makes - for the world's largest equity market, if nothing else. Having posted its best 15-day performance since 1933, the S&P 500 is now less than 4 per cent below the level reached the end of February.
US shares' rapid recovery means investment commentary has had to move on from 'is it time to buy the dip?'. The new focus is rather more revealing: even asset managers are now asking whether investors have got ahead of themselves.
Is this, then, a Wile E. Coyote over-the-cliff-edge moment, fuelled by central bank liquidity as much as anything else?
There's no doubt markets can rapidly discount very bad news - even the type of GDP drop now being factored in to forecasts. Investors are also seemingly willing to look past the huge earnings revisions that will soon be confirmed by businesses - and all while the timing of the economic recovery remains thoroughly uncertain.
But there are undeniable tensions still at play within stock markets. As the latest Bank of America fund manager survey demonstrates, allocators' cash holdings are at their highest levels since 2001, even as equities continue to rise.
And the shares that are driving the rally - US tech stocks - partly indicate that investors are expecting lockdown life to continue for a while longer. Those indices focused on commodities or banks, like the FTSE 100 or Euro Stoxx 50, aren't showing the same degree of optimism. Both are down four times as much as the S&P since the start of March.
Value shares like these aren't likely to rebound any time soon. And the appetite for tech is as much about quality shares as it is a play on domestic internet usage. But DFMs and wealth managers are right to remain wary of what comes next for their risk exposures.
The other side
As usual, the debate about whether or not equities have peaked has overshadowed similar conversations going on in credit.
Arguably, the latter is a more important discussion for wealth managers: share price movements hog the headlines, but it's bond markets that tend to drive sentiment more often than not nowadays.
Here, at least, it's not just the US that is enjoying a bounce - the Fed's junk-bond buying announcement last Thursday helped all comers. Even prior to that, DFMs had seen their fixed income positions recover well in recent weeks.
Axa IM's Chris Iggo is now confident enough to state that investment grade markets likely bottomed last month - and notes that, in 2008, the credit lows came three months ahead of equities' own.
But there are still lessons to learn for wealth managers and their fund holdings. One concerns the fortunes of absolute return bond funds. As with their multi-asset peers, these strategies were ostensibly designed for moments like these: helping smooth returns through periods of volatility.
The relatively small cohort of such strategies on offer to fund buyers didn't experience any big blow-ups - but nor did they prove particularly notable in their ability to withstand the fierce moves of recent weeks.
Drawdowns for these funds were comparable with most strategic bond funds - as were average returns over the period. Wealth managers might reasonably conclude this is another case where they should stick to their knitting rather than seeking out newer propositions.
Funds in fine fettle
The current crisis has reignited concerns that asset managers might be the “weak link” in the financial system – but no one seems to have told fund firms that.
In keeping with the trends seen in equity markets over recent weeks, many of the biggest fund groups – in the US, at least – are looking at their own businesses with a degree of optimism. BlackRock has told its employees that there will be no job losses this year; BNY Mellon has now done the same. And Fidelity said on Monday it would hire for 2,000 largely customer service roles in the US, pointing to retail investors’ rush to open accounts.
Businesses like these may be banking, in part, on their scale to see them through – and to help them snap up opportunities when they arise. But their show of strength also indicates asset managers are altogether more positive than many others in corporate America.
