Moment of truth approaches for fund buyers' new normal; Alts struggle to regain ground
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Easy does it?
Markets may be pretty subdued in comparison the upheavals going on in the real world, but the pandemic’s persistence is still giving headline writers a useful crutch on which to lean.
Indices’ rise both last Monday and today, for example, has been pinned on optimism that this is the beginning of the end for various countries’ lockdown measures.
Whatever the accuracy of these attempts to identify cause and effect, there’s no doubt that another period of reckoning for markets is drawing closer. As economic activity begins to rebound (from very low levels), investors are waiting to see whether their new favourite kind of easing - that of lockdown measures - can continue. The unwanted alternative is governments being forced into abrupt U-turns.
So far, signs of Korea reimposing some restrictions last week, and news of China reintroducing a lockdown in its north-east, have yet to move the dial. Allocators appear more concerned about the fate of the US and European restrictions.
Either way, equity investors will be sticking to their tried and tested playbook. Social distancing will remain a feature of economic activity whether or not the emergence from lockdown is successful – and that means wealth managers’ favoured plays, like tech, healthcare and even ESG will remain at the forefront of minds. Fund managers with strong style biases, as well as sector-specific equity funds, will continue to climb up the agenda for DFMs.
In the bond market, however, these shifts aren’t quite so easy to tap into. A focus on balance sheet strength will, unsurprisingly, take precedence. And the indirect effects of the lockdown may have a particular impact: SocGen’s fixed income team says many market participants are “having to take holidays in May” to use up some of their allocations. That means, despite the analysts’ medium-term bullishness on credit, “desks will be short-staffed and moves potentially violent” later this month. Allocators of all stripes will be hoping continued signs of economic uptick help smooth over these shocks.
Bouncing back
The smoothing over of March’s own shocks has long since taken place: a relatively relaxed April, under the circumstances, saw investors return to all manner of equity offerings, according to fund flow estimates.
To add to the Calastone figures from earlier this month comes new fund-level Morningstar data. It suggests the contrarian interest in UK equity strategies seen in March continued in April, as UK all-cap strategies notched up their best month for at least eight years. This time, however, it wasn’t just passives that led the way. DFMs’ favourite active UK picks were also among the big winners.
Overall, buying activity was pretty broad based. As tends to happen in rebound months, April offered something for almost everyone. Few sectors saw net outflows, the exceptions being largely unsurprising: EM debt, gilts and absolute return. Japan, a relative winner earlier in the year, was rare among equity sectors in not benefitting this time around.
Absolute return funds, as a collective, again sat at the foot of the fund flow table. The sector has retained that unwanted position whatever the market conditions of late – a sign that investors are now relatively immune to its charms.
Wealth managers, as we reported the other week, haven’t entirely given up on such strategies. And, the scale of the outflows from the biggest victim, Invesco Global Targeted Returns, has persisted despite performance continuing to confound the doubters. But March’s sell-off did also bring uncharacteristic slumps for funds that had weathered past sell-offs relatively well, like L&G Multi-Asset Target Return and some absolute return bond funds. Those blips, however brief they may prove, haven’t helped the sector’s shaky reputation, and have inevitably been followed by outflows.
Dollar divergence
What a difference a year makes. Last summer was all about the pressure the president was putting on the dollar in an attempt to make the US more competitive. This month, he’s has been commending the greenback’s resilience.
About-turns of this kind aren’t out of the ordinary for Mr Trump. On this occasion, his thinking has seemingly been overtaken by events rather than just a sudden change of heart. Representing American strength is more important than ever, particularly in an election year.
For allocators, it would seem to solidify the arguments of those who doubted that dollar weakness would be a viable trade to embrace this year. Such predictions, regularly thwarted over the past half decade, look further away than ever at this point.
