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The precious few
Five months of the year have now passed, and there’s still one unalloyed winner atop the fund performance charts: gold. But it’s not been such plain sailing for wealth managers.
The typical gold mining fund is up around 30 per cent year to date, and 50 per cent over the past eight weeks. Last year investors were questioning gold’s role as a diversifier; this year they’re finding it’s an answer to a variety of different problems.
Those worried about inflation have sought refuge in the precious metal – but so too have those worried about deflation. Then there are increasing concerns about economic and political stability to factor in.
For DFMs, there are still a few flies in the ointment. Those who do have exposure to gold miners tend to do so via funds like Merian Gold and Silver. But silver’s rockier ride this year has limited that product's overall returns.
Volatility isn’t confined to silver plays. Not unreasonably, many allocators nowadays prefer to avoid gold equities altogether and hold physical gold ETFs. Returns here have been rather more limited: the iShares Physical Gold ETF is up 13 per cent year to date and 9 per cent in the past two months. On a risk-adjusted basis, that will have done the job nicely for holders.
But the final and most fundamental hurdle for discretionaries is that there simply aren’t that many who have exposure to bullion in any shape or form. Those who do hold gold have been upping its presence in their portfolios – so much so that one DFM now counts a gold ETF as the largest holding in its moderate model. They remain very much in the minority: according to our asset allocation database, no more than a quarter of wealth managers have precious metal exposure in their typical portfolio. And it may take more than a couple of good months to change that mindset.
As gold continues to rally, equities - in the US in particular - continue to withstand whatever the wider world throws at them. The Nasdaq is near another record high, and on a forward P/E basis, the S&P 500 is now at its most expensive level in 20 years. Headline figures mask differing fortunes at a company level, but at this stage it's reasonable to state that investors are banking on a recovery that looks relatively V-shaped.
It’s not just the US that’s off to the races. SocGen’s Andrew Lapthorne notes, by way of a further example, that Japan’s small-cap Mothers index is accelerating even more quickly. It’s now 80 per cent above its lows, though as the analyst adds, “long-term, it has been a poor way to make returns.”
In this particular case, however, DFMs have a little more exposure than you might expect. Legg Mason’s Japan Equity fund has a pretty clear correlation with the Mothers index: consequently, it’s set off on a not-unfamiliar V-shaped recovery of its own. The fund, never one for the faint-hearted, is up 34 per cent since the end of March – almost twice the return for the average Japanese equity strategy. That means it too is sitting on a double-digit return for 2020 thus far.
Too much of a wild card for some of the bigger wealth managers to include in their models, the strategy does still have its advocates elsewhere in the DFM world. Our fund selection database shows several smaller discretionaries still back the vehicle. Few DFMs are sure on how to play Japan at the moment. But adding more volatility into the mix has paid off for a plucky handful.
Commute-free allocators have been able to start their working day a little later since staying at home – those without young children to tend to, at least. And there’s growing evidence that another overhaul of working hours might be on the way. Feedback from the London Stock Exchange’s consultation on reducing market trading hours shows a broad majority in favour of such a move. Notably, few felt that liquidity would be affected.
Where primary market participants lead, those one step removed in the world of fund selection could follow. But there are still a few creases to be ironed out before shorter days become the norm.
The preferred option was for markets to open in the UK between 9am and 4pm, as opposed to 8am and 4:30pm currently. But the LSE noted it would wait for the outcome of similar consultations on the continent before reaching a decision. Major European markets already open at 9am local time (8am in the UK), and are consulting on changes of their own. Avoiding harmonisation issues is just as big an incentive for market makers as improving work/life balances.