Aim portfolios' unlikely (relative) resilience; Wealth firms seek specialist fund saviours
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Aim to survive
It’s logical that the very riskiest stocks get hit hardest in a crisis – but that hasn’t been the case for discretionaries’ Aim portfolios this time around.
On the surface, the quarterly statements received by clients a few weeks ago look pretty bad: drops of 20-30 per cent are hard to sugarcoat. Given the lack of diversifiers contained in such portfolios, these outcomes reflect the very worst in DFM performance on the month.
But it could have been much worse. Because in reality, Aim stocks fared relatively well during March’s market plunge. The FTSE Aim All-Share index’s loss of 20 per cent was fractionally better than that suffered by the FTSE Small Cap benchmark.
Aim shares aren’t all small caps these days, of course – DFM money has had a role to play in that shift – so it’s worth noting the index also beat the FTSE 250’s 21.7 per cent fall.
This isn’t much in the way of relative return, but it does stand in contrast to Aim’s historical performance. The index lagged its small and mid-cap equivalents by several percentage points during the October 2018 sell-off, and did the same two months later when stocks slid again.
And DFMs can also point to outperformance of their own this time. For Q1 as a whole, the average discretionary Aim portfolio shed slightly less than the index, according to our analysis of industry data. Wealth managers had already proven adept at outperforming on the upside, too.
But there seems little point denying the underlying truth: March’s falls were significant enough to get investors wondering again whether tax benefits are worth this level of volatility. April’s rally will have helped, but Aim’s relative resilience may not be enough to convince all clients to stick with such portfolios in future.
Niche pursuits
Wealth managers who cut back on equity positions last month may well have topped up again in the last few weeks. But there’s one part of the fund universe which managed to attract discretionaries amid the March madness, too.
Unsurprisingly, average equity allocations in every region ended March lower than they'd started, according to our asset allocation database. A combination of steep falls and resultant wariness of risk assets saw to that. For the vast majority of DFMs, it was too soon to be buying the dip.
These drops weren’t uniform, however. A quarter of discretionaries did opt to add to their specialist equity offerings on the month.
That wasn’t enough to prevent the average weighting to thematic or global equity funds to drop from 7 to 6.5 per cent, courtesy of several other peers paring positions. But it does suggest some DFMs thought they needed to become more focused in their equity exposures in order to capitalise on market dislocations.
Specialist funds haven’t typically found favour with discretionaries in recent times, but if eking out outperformance starts to become more difficult in the coming months, that could soon start to change. At the moment, the obvious candidates in terms of thematic funds are the likes of tech or heathcare offerings. Our fund selection database suggests these aren’t the only areas of interest for wealth managers. We’ll examine the big buys and sell of the crisis in more detail next week.
Switch hit
Signs of buying across the board last month have emerged this morning via Calastone data showing a record month for equity fund inflows. That’s not surprising given the scale of the market rally seen in April - even if some allocators may be rather disbelieving of indices' current buoyancy.
Calastone also suggested that much of the buying – and selling – activity seen in 2020 as a whole has been due to investors switching funds, rather than divesting from markets entirely then buying back in.
That would appear to stand in contrast to DFMs’ own behaviour. Many upped cash levels at the end of the first quarter, and have tended to stick to their policy of keeping switches to a minimum. As indicated above, there are exceptions to that rule. But it seems unlikely at this stage that April saw a sea change in fund preferences – particularly as many of the winners of recent times continued to flourish at the start of Q2.
