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Rethink

Technical bull markets aside, the economic outlook suggests not all allocators are rushing back into equities right now. And if DFMs are erring on the side of caution (and fixed income), they’re not alone.

Our latest tally of quarterly asset manager outlooks suggests that fund firms, too, have turned much frostier on risk assets for now, bar one or two exceptions. The latest views are captured below:

As the chart shows, the relative caution that fund firms showed towards equities at the turn of 2020 now looks almost bullish. Positive feeling towards the UK, Japan and emerging markets has dropped off sharply since then. Europe, long an unloved region, has simply accumulated stronger levels of negative sentiment.

However, some signs of a decoupling might be emerging. US stocks, once the subject of begrudging support among CIOs, have managed to maintain the same level of popularity as they did in the previous quarter. Asia, the focus of some recovery hopes, has done the same.

In fixed income, a regime change has occurred. Government bonds have, unsurprisingly, risen in allocators' esteem after a broadly successful sell-off, while lower valuations and the decline of equity income have seen firms grow more positive on both investment grade and high yield credit.

This shift in dynamics appears to have claimed another victim: with risk appetite receding and interest on the up in safer parts of the corporate bond universe, emerging market debt has lost its status as a consensus overweight.

Not dead yet

The equity rally that’s increasingly unnerving investors has continued overnight. The driving forces behind that rise remain the same: technology-focused trusts are trading at all-time highs this morning. Yet the number of individual stocks that are flourishing remains very low by historic standards.

All this has once again seemingly sounded another death knell for value strategies. But there are still one or two glimmers of hope out there. Morningstar research focusing on US-domiciled equity funds has found that value funds were more likely to outperform their particular benchmarks than growth-focused peers during both March’s downturn and April’s rally. Value managers’ relative ease in underweighting oil, and growth funds’ struggles to overweight tech, partly explain these results.

That was small solace last month given the difference in index returns. Even the most alpha-generating US value fund would have struggled to match a benchmark-hugging growth strategy in March.

This month, however, value hasn’t lagged as much as the tech titans’ surge might suggest. US value indices are just a percentage point or two behind growth benchmarks.

How does this all play out for UK wealth managers, nervous over the rally and reconsidering their buy-list of UK or European-domiciled US strategies? On these shores, there’s no denying that US growth strategies have continued to dominate outperformance charts in April. Growth-focused active managers have proven more adept at riding the rally than their value counterparts: Baillie Gifford American and Morgan Stanley US Growth being the two most obvious examples.

That said, the best-performing US strategy of all this month is a value fund, and a tracker at that.

Vanguard US Fundamental Value, aided by its large-cap focus, has trumped all comers. This is, admittedly, the same fund that sat rock bottom of the returns table in March. But its resurrection might give food for thought for some buyers.

Family affair

Tuesday’s casual prediction that Shell would avoid cutting its dividend this week has quickly been proven wrong. A 7 per cent share price fall is arguably a rather modest reaction, suggesting many investors were already resigned to their fate. Nonetheless, as the third-largest dividend payer in the UK, the move is another blow for income investors.

As it happens, Terry Smith has chosen today to repeat his suggestion that investing in equities for income is a foolhardy pursuit. Few, if any, DFMs would agree with that. But his FT Money column does also contain some advice for those sticking to their guns: focus on family-owned businesses, large and small, that pay out dividends. Owners’ reliance on those payouts mean few have cancelled them thus far this year.

True, such businesses are relatively small in number. Nonetheless, income investors searching for safe havens might be inclined to take a closer look.