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Asset Allocator

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Selectors look to £1bn fund club, buy-list risks on the rise, & the return of patient capital

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Six months in to 2020, there’s still no sign that Covid-19 has materially affected the three big trends seen in markets over recent years. As Bank of America summarises: central bank liquidity is still driving markets, credit prices are still driving equities, and credit and tech are still ruling the roost in terms of investor preferences.

Business as usual has been of benefit to wealth manager portfolios – the pandemic may have thrown up many unanswered questions, but allocators have found their existing holdings pretty well placed to deal with the immediate consequences.

A look at the absolute winners of H1 2020 underlines that fact. In many of the main equity sectors, the fund in pole position over the first half of the year tends to be familiar ones. In UK, Europe, US and Global equities, £1bn-plus strategies come out on top. That doesn’t necessarily equate to funds that are the most popular with DFMs – but the likes of Royal London Sustainable Leaders will be very familiar to fund buyers nonetheless.

The market’s focus on growth has again been good news for Baillie Gifford. That’s most apparent in the US, where Baillie Gifford American has trumped all-comers. Yet the fund house also has the single best performing fund in both the European and Global equity arenas, too.

Fixed income winners have also been pretty consistent – but some sectors have been playing catch-up. In the corporate bond space, it’s perfectly understandable that buyers shun the long-dated strategies that have again come up trumps in 2020. In the strategic bond fund sector, Allianz Strategic Bond’s runaway returns have seen it rake in £600m in net flows in the past three months alone. But the strategy was also a top quartile performer in both 2019 and 2018 – meaning the small band of DFMs who bought in last year have been richly rewarded.

Same again

As the strong get stronger, and clustering behaviours increase, buy-list risks are also on the rise.

The increasing homogeneity of DFM fund selections has been a constant concern for several years now – and our own analysis has shown that the trend is becoming more pronounced in core areas like UK equities.

To be fair, our fund selection database does also indicate that wealth managers have done a good job at diversifying their holdings in other asset classes. Said database encompasses more than 40 different DFM portfolio ranges, which hold more than 1,100 funds between them – so there is a risk of over-egging the concentration concerns.

It’s not just UK equities where herding behaviour is evident, however. Increasingly, US allocations are also falling back on old favourites. In the past couple of years, we’ve documented how US equity picks became more diverse, as selectors turned to value plays or simply sought out less-heralded options.

In recent months this trend’s gone into reverse: as tech has rallied further post-Covid, buyers have gone back to more familiar names like Loomis Sayles US Equity Leaders and, yes, Baillie Gifford. That’s partly because the opportunity cost of ignoring tech has become too great to ignore. But that isn’t the whole reason: strategies run by Polen Capital and Sands Capital, for example, have continued to soar themselves. So the return to big names does suggest a need for reassurance, and a reduced willingness to stick necks out with unheralded fund selections. 

Ever-patient capital

Patient capital is back on the agenda. It never really went away, but clearly the attractions of the phrase took something of a knock last year. Now, the pandemic has brought the topic back to the fore - and resurrected some older ideas, too.

The idea centres on the creation of funds to help support UK businesses. Schroders’ Peter Harrison says the company is considering launching an investment trust to help provide this equity. He also emphasises the fund firm has encouraged the government to create its own “patient capital” fund along similar lines. The FT picks up the theme, and draws comparisons to the establishment of 3i after the second world war. Converting government loans into equity may be on the agenda in the medium term – at that point, investing in the recovery could take on a different tone for wealth managers, too.

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