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The missing link for discretionary portfolios; The ins and outs of the big stock divergence

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Missing link

The UK’s sale of gilts at a negative yield last week wasn’t exactly an obvious buy signal. But there are those who suspect some parts of the government bond universe are still offering value.

Index-linked gilts had effectively already joined the negative-yielding club prior to last Thursday. A major price rally over the past eight weeks means ten-year linkers now yield minus 2.9 per cent, according to Tradeweb data.

After prices collapsed dramatically during a ten-day period in early March, the average linker fund has since risen more than 20 per cent off its lows. But some commentators suggest there are still opportunities out there for those looking to balance portfolios. Looking across the fixed income universe, Axa IM’s Chris Iggo notes:

Some duration exposure for portfolio diversification can still be achieved….the UK is a good example. The duration of the 10-year plus conventional gilt index is 19.7 years and the index-linked index is 22.9 years. That’s an additional 30bps of performance for every 10bps move lower in yields for linkers relative to gilts.

The other point being that yields alone aren’t the only way to make returns. Does this translate into anything useful for DFMs? Our asset allocation database does indicate there were one or two wealth managers who saw March’s price slump as an attractive entry point to buy more inflation-linked exposure. But these additions were to global index-linked bonds, not UK-specific variants.

That might not represent scepticism over UK linkers, so much as a bet that all regions are starting to experience similar price dynamics. It’s also another indication that the idea of reinflation further down the line is already playing on some allocators’ minds.

Fund buyers' market?

Equity market divergence is all the rage again this year. Tech and, to a lesser extent, healthcare’s dominance has become a well-established fact among investors large and small. This isn’t the whole story, however – particularly for those who tend to invest via collectives.

While wealth managers and their kind are taking a greater interest in specialist funds, they continue to invest largely on regional lines in the main. And while US large caps have been attracting most of the headlines in 2020, something of a smaller company comeback has emerged in recent weeks. The average US and European smaller companies fund has done better than their mainstream equivalent since the start of April.

What’s more, the average European small cap strategy is now almost on a par with the typical US equity fund over that period. The former group are still far behind year to date, but the data suggests the price activity of recent weeks hasn’t been as uniform as the overarching narrative suggests.

That said, another type of divergence is very much alive and well in equity markets. On a stock by stock basis, the proportion of companies that have truly bounced back since March remains relatively small. Bank of America research shows that more than two thirds of its 3,000-strong global stock universe remain in bear markets.

The one thing that both these trends have in common, of course, is that they create opportunities for active managers. For a rudimentary strategy, buying tech has worked extraordinarily well this year and last. But active allocators will recognise there are plenty of ways to complement this move - even if it does end up persisting for the rest of 2020 and beyond.

Platform for growth

Earlier this month we discussed how Hargreaves’ latest results showed it again confounding the doubters, after a rather grim year publicity wise. Yet the platform market’s resilience isn’t down to HL alone: subsequent results from both AJ Bell and Transact owner Integrafin were also, notably, better than expected.

As with Hargreaves, both AJ Bell and Integrafin have their sceptics: Liberum is wary of the former on valuation grounds, and Numis cautious on the latter due to its perceived “premium pricing”. But the underlying trends, of better than expected flows, indicate that investment appetite is holding up reasonably well across the board.

Retail investors’ commitment to help buying the dip will have further aided D2C players this year. Advisers, by contrast, have suggested new business is harder to come by. Nonetheless, Transact’s results suggest the platform market still has plenty of opportunity over which to compete.

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