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Twists and turns

Last week we noted DFMs’ UK equity income picks had seen unusually high levels of turnover in the first half of 2020. But that’s not the only area where discretionaries have been more active than usual of late.

Unsurprisingly, the end of March prompted a reconsideration of wealth firms’ model portfolio choices. As the extent of Federal Reserve support became clear, that reassessment came to mean greater interest in credit in particular.

When it comes to equity funds, however, change has largely come in the form of alterations to underlying holdings rather than asset allocation. The departure of many domestic income payers has made UK income a prime candidate for adjustment. And as the chart below shows, a desire for more specialised exposure has also led to a significant amount of chopping and changing on the global or specialist equity front.

Typically, this hasn’t changed overall allocations that much – exposures tend to be limited to a couple of percent here and there. Nonetheless, it has involved adding new funds to portfolio ranges: the majority of the two-thirds who’ve been changing things on this front have been buying, rather than selling.

 

By contrast, to take another example from the chart, European changes have almost always been due to wealth firms selling funds, and/or consolidating exposure in a smaller number of strategies.

Elsewhere, activity isn’t so unusual. One final point of note is in EM: DFMs may not have much confidence in the asset class, but at the same time they’re reluctant to rock the boat in terms of fund selection.

Later this month we’ll take a closer look at the kind of equity vehicles discretionaries have been buying and selling. Tomorrow, we’ll examine what appetite for change there’s been in other asset classes so far this year.

E numbers

The latest fund manager survey from Bank of America suggests a little more optimism creeping in: investors no longer think the current moment is a bear market rally, and there are signs of renewed interest in inflation assets and even, dare we say it, value.

All the same, allocators aren’t getting carried away. Just 17 per cent now expect a V-shaped economic recovery, and managers are still wanting companies to shore up balance sheets rather than spend. Gold’s sharp rise over the past few months, meanwhile, means more investors think the combination of equities, bonds and gold are overvalued than at any time since 2008.

This latter assessment is, admittedly, based on managers’ views of a portfolio split equally between shares, bonds and bullion – not exactly a commonplace strategy in the wealth management world.

But this month’s survey also touches on a subject of more relevance to modern portfolio construction: ESG. Asked what ESG theme they think will outperform most over the next 12 months, a net 43 per cent said climate change. The figure was well in advance of any other, with no other choice coming within 30 percentage points of the theme.

That may come as a surprise to some allocators, given Covid-19 has placed renewed focus on the likes of health and safety and indeed demographics/ageing – two of the other options given to those polled. Likewise, some ESG-focused managers and selectors can focus on governance rather than explicitly environmental concerns. But if ESG preferences really are driving certain stocks higher – and others lower – then investor expectations may prove an important barometer of things to come. A single datapoint it may be, but it suggests investors should keep the ‘E’ in ESG at the forefront of their minds.

Bullion Buffett

Another investor who’s been changing up their portfolio is Warren Buffett. A securities filing from late last week shows Berkshire Hathaway sold down its US banking stakes in the second quarter. The firm also bought a stake in gold miner Barrick Gold over the period.

Mr Buffett’s clout is still significant enough to prompt a 7 per cent rise in Barrick’s share price in after-hours trading on Friday. But the FT won’t be alone in noting that his latest moves are very much in keeping with consensus opinion.

That said, these shifts are still at the margin of Berkshire’s portfolio, and its preference for financials has far from disappeared. The question for the company – and ultimately, perhaps for the future of Mr Buffett’s reputation – is whether these changes represent simply a nod in the direction of the prevailing trends, or rather the start of a wholesale rotation.