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Stasis

Look at fund firms’ quarterly asset allocation calls over the past couple of years and one thing stands out: the tendency to chop and change is much more pronounced than it is among wealth managers.

This is in part a function of how those views are constructed: even fund groups with house views don’t tend to oblige their managers to follow suit. A change in mindset doesn’t have to involve trading in and out of a given asset class – and if changing course is more of a hypothetical exercise, there’s less risk if the call proves incorrect.

The other factor is that unitised portfolios, particularly those buying securities rather than collectives, have more scope to adjust their positions quickly and affordably.

All of which is a long-winded way of saying that Q2 2020 was a big outlier in terms of fund group behaviour. The chart below sums up asset manager views as of the end of the quarter:

What’s striking is not the calls themselves, but how little they’ve changed over the past three months. Of all the fund firms included in the survey, just one – Fidelity – has materially altered its view on any of the asset classes outlined above. And that call, moving from negative to neutral on Europe, is hardly one to set the world alight.

For all the daily monitoring of virus cases and signs of economic slowdown, the big reset observed at the end of March has quickly become the new normal for allocators. The general preference for US equities and corporate debt is pretty deeply entrenched, and imagining an alternative is a tough ask at the moment.

Entering orbit

Wealth managers may be less inclined to reverse allocation calls in a hurry, but they aren’t completely against such moves. And while they too have tended to stick with the changes made in the aftermath of the Q1 drawdown – more on that later this month – there’s been other things going on under the surface.

We’ve mentioned the growing interest in specialist equity portfolios on several occasions of late. That’s tended to go hand in hand with a preference for big, well-established players in the UK and US equity space – a core/satellite strategy, if you will. But this approach also has room for newer offerings. The likes of Tellworth UK Smaller Companies, run by ex-Cazenove pair Paul Marriage and John Warren, and Rob Burnett’s Lightman European, have started to appear on buylists for the first time this year. Most selectors will be familiar with those managers’ approach, and that reassurance is important at a time when neither style is flourishing relative to peers.

Both these funds are part of the multi-boutique operation at BennBridge: oversight of this kind is also more important for wealth firms these days.

For those who are well and truly going it alone, and with whom selectors are less familiar, the task is tougher. The UK Buffettology fund, for instance, despite having amassed £1.8bn in assets and remaining right at the top of the UK performance charts, still has little buy-in from DFMs.

But another retail favourite is starting to make waves: Blue Whale Growth, backed by Peter Hargreaves and run by ex-Artemis manager Stephen Yiu, is now making it into model portfolios for the first time. Its focus on quality companies, and US tech, is clearly a big factor here. But so too, perhaps, is wealth firms’ willingness to seek out under-owned offerings.  

Gilt trip

Gilt issuance this year is set to double the previous record reached at the peak of the financial crisis – but do investors really care? Borrowing costs are at record lows once more, in no small part because of the QE programmes again in train across developed markets. The UK, despite having the added concern of a Brexit cliff-edge to deal with, is no different.

For bond managers, these dynamics are a sign that yield curve control is effectively already here in the US and Europe. That means buying opportunities are relatively thin on the ground. The flipside is that the possibility of significant losses for government bond portfolios is also materially reduced.

Governments themselves, meanwhile, once again have a golden opportunity to refinance their troubled economies. The UK, where the average maturity of borrowings is far higher than in other countries, has particular flexibility in this regard. But whether Treasury departments agree is another question entirely.