Asset AllocatorAug 19 2020

Wealth firms expand quest for alts winners; Selectors look for a different kind of high

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Thinning crowds

Concerns over valuations may be on the up, but most allocators agree that equities remain one of the only games in town for investors.

Consensus on other assets is much harder to find: for every wealth manager who insists on holding government bonds, there’s many who maintain their moment in the sun will soon be over. And the sight of alternative strategies coming up short in recent years has cast plenty of doubt on other options, too.

But at a fund selection level,  this year’s market moves haven’t prompted allocators to rethink diversifiers as much as you might think. Compare the chart below with yesterday’s look at equity fund turnover, and the lower level of activity is apparent.

Take corporate credit – one asset class on which there’s been plenty of consensus in recent months. The rush to add exposure hasn’t translated into too much change to underlying holdings in either the corporate or strategic bond sectors.

The same can be said for gold: bullion’s 2020 renaissance hasn’t changed the minds of many DFMs. What’s more, discretionaries consolidating their exposures into a single strategy account for a fair proportion of this year’s commodity fund switches. As that implies, the number who have bought into gold funds for the first time this year remain few and far between.

There are busier areas. Property fund turnover levels are unsurprising: wealth managers either moved out of open-ended physical funds ahead of the Q1 suspensions, or were forced to react by hiving off these parts of their model portfolios. The reopening of BMO Property Growth and Income has also seen many head for the door.

But it’s alternatives that stand out the most. Wealth firms are still searching high and low for that most precious of strategies: the genuine diversifier. There are now more than 150 absolute return or Ucits hedge funds held by the portfolio ranges tracked by our fund selection database – but increasingly few of them qualify as a consensus pick.

Worlds apart

A new record high for the S&P 500 is a moment to pause and reflect. The risks to both the rally and the global economy remain all too apparent. As the FT reports, yesterday’s price action reflected the prevailing tone of recent months: more shares fell than rose, but big tech pushed the index into the black.

There are signs that more bullish behaviours are emerging: according to BMO, US inflation expectations are now more or less back at pre-Covid levels. For this we should perhaps thank fiscal stimulus as much as the much-discussed support from the Federal Reserve. Politicians may still be haggling over the next relief package, but earlier fiscal support measures were swifter and larger than most other countries’.  

So the US continues to stand out, and allocators wonder whether they should tilt their portfolios still further in this direction. We’ve noted the increased uptick in US allocations in recent months, and there are small signs of change on a fund selection level, too. A few DFMs have been tapping the small-cap and mid-cap parts of the US market in a bid to diversify their holdings somewhat.

One beneficiary of that has been Brown Advisory, long known for its range of US equity portfolios. But surprisingly, it’s the firm’s Global Leaders fund that’s attracted most discretionary interest this year. Just as notable is the fact that this strategy has a relatively limited amount of US exposure – a 38 per cent weighting is peanuts compared with the 55-65 per cent regularly found among global equity peers. As buyers ponder the outlook for US shares, global strategies that seek to diversify a little more widely might be coming back into fashion.

Sustaining the momentum

Active managers’ belief that sustainable investing can be a lifeline for their businesses was given more credence last month, according to Morningstar figures. Sustainable strategies took in £1.2bn in July, accounting for more than half the £2.4bn in net new money amassed by all UK-domiciled funds.

The trend is particularly evident among equity funds: those with a sustainable slant are still racking up inflows, whereas those without are still bleeding money. The latter, as usual, is likely down to a handful of strategies on which sentiment has soured. Nonetheless, most non-sustainable offerings remain stuck in limbo: not seeing material outflows, but not attracting cash either.

And as the months go by, DFMs are also starting to add more ESG exposure to their mainstream strategies. For the first time, sustainable funds are ranking among the most popular funds of all stripes. We’ll investigate these trends in more detail in the coming weeks.