Allocators look beyond the market rotation; DFMs' specialist portfolios show signs of maturity
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Stock successes
The developed market rally has paused for breath this week, but hitherto out-of-favour equity regions look much rosier than they did in Q1: European stocks and cyclicals remain far above their recent lows. And the party’s still going for DFMs’ least favourite region – emerging markets. EM shares are up for a ninth straight day, helping further pare their year-to-date losses.
As we reported yesterday, there’s also been some evidence of a stock market style rotation, particularly in the US. Momentum stocks have stuttered, and that’s got tongues wagging again about value shares – at home and abroad. The contrarian indicators look about right: it would be typical if Mark Barnett’s departure from Invesco coincided with a bottoming out for the sector.
The accuracy of such predictions will only be known after the fact. And there are more pressing problems for wealth managers’ UK positions. Having lagged during the downturn, a combination of dividend cuts and the nascent shift out of quality stocks means UK equity income funds have been relative laggards during the rally, too. That wouldn’t be such a problem if holders could be certain that income streams would continue - the reality, of course, is somewhat different in 2020.
Trying to discern medium-term patterns from short-term shifts in market leadership is far from easy. Allocators will be hoping to identify more permanent shifts – which is why ESG remains the hottest of hot topics. Like quality factors, ESG indices have lagged during the rally. But it’s simpler to make a compelling case for long-term outperformance when it comes to the latter.
The board of the Temple Bar trust appear to think likewise. As a value strategy, the trust faced a difficult decision when tendering for a new manager: stick or twist? In the event, this morning they've announced plans to add a sustainable focus to the existing strategy - despite shareholders having rejected a negative-screening process just a few months ago. Right now, most allocators might agree that’s pushing ahead with ESG preferences is wiser than any explicit style bias.
Aim and fortune
ESG may be in vogue, but there’s another wealth manager favourite that’s shooting the lights out this quarter: Aim stocks. A month ago, we discussed the Aim All-Share’s surprising resilience during the crisis. Since then, it’s performed much as investors would expect during a rally: outperforming large caps and keeping pace with mid and small-caps.
In sum, the index has rallied more than 40 per cent from its lows, and outstripped all style and market-cap weighted UK indices so far in 2020. Over the past year, it’s second only to ESG indices in terms of capital growth.
A focus on growth has been beneficial for most of the year – as has the 1000-strong index’s natural diversification, as Darius McDermott of FundCalibre points out. It all makes for a pretty pleasing 25th anniversary for the index, first launched in June 1995. It also suggests there’s still plenty of opportunity on offer from UK shares – away from the woes currently being experienced by income payers, cyclicals and some domestic-focused stocks.
Wealth managers’ own Aim portfolios have proven adept at showing how active approaches can best this particular index: most remain ahead of their benchmark so far this year, even after the rally. As discussed in May, whether clients view this as a success is another matter; the return of volatility will have reminded them that tax benefits shouldn’t be a tail wagging the dog. Nonetheless, Q2 statements will make for much more pleasant reading.
Scaling back
Fund firms’ value assessments have proven something of a damp squib thus far: the closure of certain strategies, and paring of certain fees, have tended to be exceptions rather than rules. But in some cases there are more definitive goings on: Ignites Europe reports this morning that Invesco’s assessment is notable for its explicit rejection of the idea of passing on economies of scale to fund investors.
Most other asset managers have preferred to skirt around the issue in their own assessments: they haven’t passed on these savings, but nor have they ruled out doing so. Invesco is, perhaps, at least being more honest about its intentions than peers.
The problem is that the firm’s US operation does use economies of scale – an inconsistency which has unsurprisingly led to criticism from commentators. And whatever the arguments’ merits, the episode confirms that industry-wide change on this front looks a long way off in the UK.
