Crowded trades fail to deliver for fund buyers; Wealth firms ponder CGT portfolio pains
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Health check
It’s a stark statement: long tech is now the most crowded trade ever seen, according to Bank of America’s latest fund manager survey. Admittedly, that ‘ever’ only extends back to the survey’s birth in 2013. But the stat may well chime with allocators’ own thoughts regardless.
The catalyst for change, per BofA, would be a coronavirus vaccine. As catalysts go, that’s one with which most investors – and human beings – would be happy enough. And healthcare itself is arguably on allocators’ minds just as much as tech right now. Because while tech is deemed the most crowded trade, it’s health stocks to which investors are most overweight relative to history.
That’s the finding of the BofA July survey, just as it was in May (last month the popularity crown went to US equities as a whole). UK wealth managers' own behaviours reflect this to an extent: as DFMs turn to specialist portfolios, healthcare plays have been towards the top of the agenda. The likes of AB International Healthcare are now making it into mainstream portfolios for the first time.
Prior to this, buyers had tended to look to just one such strategy – Polar Capital Healthcare Opportunities. Now both active rivals and passive options are on the table.
That said, the evidence suggests many would be better off sticking to what they know. Since the lows on March 23, the vast majority of healthcare strategies have failed to match the return of the MSCI World: Polar’s fund is one of just two exceptions. Health might be all the rage, but that’s yet to translate into outsized returns in most cases.
Diminished returns
While talk of UK revenue-raising initiatives focused on a possible wealth tax, or the usual spectre hanging over pensions reliefs, few discussed the possibility of reforms to capital gains taxation. That discussion has well and truly begun now, after Rishi Sunak yesterday ordered a review of the current regime.
The process will feel familiar to wealth managers, who have already watched on as the Office for Tax Simplification made some striking proposals as part of its previous review of inheritance tax. At the same time, they’ll note that none of those proposals have yet come into force.
If it were to come to pass, a CGT overhaul might have particular consequences for portfolio construction. After all, in years gone by, commentators have viewed cuts to CGT rates as being beneficial to total return investing.
Needless to say, it’s unlikely that further cuts are on the agenda this time. And it would be unfortunate timing for wealth firms if CGT rates went up at a time when the idea of taking income from capital is gaining currency.
Whatever the ultimate upshot of the review, allocators will recognise that some form of tax increase is probably overdue. And if they had to choose between a CGT hike and an end to Aim tax reliefs – to take the example of the other major change that’s been floated in recent months – they’d likely say the former is the least calamitous option from a portfolio perspective.
Gaining ground
June was another month in which index fund flows stood at odds with their active counterparts, according to Morningstar. A net £626m was put into index funds on the month, compared with an estimated £777m outflow from active strategies.
There were more signs that ESG is starting to occupy investors’ minds – a number of sustainable strategies featured in the top 50 sales charts for the first time. But interest here isn’t yet great enough to offset outflows from active UK equity funds and the like.
Just as notable is trackers’ growing market share. Index funds now account for 26 per cent of the UK market, Morningstar figures suggest, up from 22 per cent a year ago. Both figures are well up on the Investment Association’s own estimate of around 18 per cent. Either way, the pandemic - and resultant market moves, both down and up - has yet to put the brakes on the upwards trend.
