Allocators await the equity portfolio catch-up; Fund buyers look beyond the US for tech plays
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Bottom up
The emergence of the European recovery fund, and the continent’s (relative) success in containing the spread of Covid-19, has yet to translate into a meaningful move in European equities this summer.
The story of recent weeks has focused on the struggles in the US – both on the virus front and in terms of its next policy response. Over the past three months, however, the S&P 500 has outperformed the MSCI Europe in local currency terms. That’s because Europe’s recent strength has emerged via its currency rather than the stock market.
So UK wealth managers’ European positions have, in fact, often outperformed their US equivalents over the same period: when judged in sterling terms, European benchmarks have done better than the S&P since mid-May.
Fund selectors remain relatively cautious about their European exposures, even after confirmation of the recovery fund’s formation arrived on July 21. We’ll look at latest positioning in more detail later this month, but suffice to say there’s a long way to go for European equity weightings that were languishing at record lows as recently as April.
Even now, most moderate portfolios have more in unloved emerging market equity strategies than they do in Europe. And there have to be doubts over the potential for future gains, even now the policy response looks more assured.
Some analysts proclaim a structural shift in the European approach, but net long positions on the euro are already at the highest levels on record. At this point, there’s only so much more the currency can do for UK-based allocators. If the European renaissance is to tempt more buyers, European companies themselves are going to have to take on more of the heavy lifting.
Summer holiday
Signs of increased interest in European equity funds are already visible in July fund flow data from Morningstar.
A handful of European strategies make an appearance towards the top of the table for the first time in many moons, and their precise identities aren’t much of a surprise. DFM favourite BlackRock European Dynamic is up there, recording its largest monthly inflow since 2013. A selection of tracker funds also feature, for those seeking to quickly take advantage of the anticipated rally.
And Baillie Gifford European ranks as one of the most popular funds in the UK universe for the second consecutive month. The fund has shown it is possible to tap into the tech theme via a European equity portfolio – even if that occasionally means buying US-listed shares of European businesses such as Spotify – and its returns so far in 2020 prove that point.
But in contrast to their preferences in the US, Japan and elsewhere, wealth firms have typically been reluctant to turn to Baillie Gifford when it comes to European exposure. Whether prevailing trends change that mindset remains to be seen.
This trend aside, the overriding lesson to take from the Morningstar data is that investors of all stripes have settled down for the summer. Portfolio churn did increase notably in the aftermath of the Q1 sell-off, but most are now content enough with their choices, particularly as markets themselves are becalmed once again. To that end, very few funds saw material outflows in July. For now, fund selectors are happy to leave the big decisions for another time.
Flow show
One positive consequence of those relatively calm markets is that wealth managers themselves are seeing more money being drip-fed into portfolios. Investment Association statistics for June show that a net £483m flowed into DFMs’ coffers on the month – the highest level for more than a year, and only the fifth time that the figure’s been in the black over the past 12 months.
Gross sales were also at their highest level in some time, suggesting that this is about new business rather than stemming the flow of assets moving elsewhere. A vote of confidence in wealth firms, or just clients feeling they may be missing out on some action? Either way, DFMs will see it as a welcome boost in difficult times.
