Buyers hunt for credit rally sweet spot; Charting the changing face of UK income buy-lists
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Special K
The K-shaped recovery isn’t merely making itself felt in equity indices. Companies in the US have also found something similar happening in the bond market. The big firms are getting issuance away at record low yields, while smaller businesses are being forced to turn elsewhere.
From an investor’s point of view, however, there’s not so much evidence of bifurcation. Investment grade credit has now recouped all of the losses sustained earlier this year, and high yield debt isn’t that far behind. And those trends are applicable on these shores, not just in the US.
What’s more, as TwentyFour points out, central bank support has helped bring down estimated default rates both home and abroad. European HY default rates are now predicted to be little higher than 5 per cent next year. In the US, the rate is deemed unlikely to rise about 10 per cent, compared with a high of more than 15 per cent in 2009.
While the outlook may not be so bad, the question is where to find value. For TwentyFour, the answer lies in investment grade financials – legacy bank and insurance debt in particular. Some wealth managers clearly sympathise: in recent months our fund selection database has shown one or two wealth managers adding strategies that invest in subordinated debt.
This isn’t the first time over the past decade that financials have been viewed as a viable bond market sweet spot. And while DFMs’ preferred strategic bond funds are still stocked up on government debt, sterling corporate bond vehicles are better positioned. Financials account for a decent chunk of UK credit indices, which means both trackers and active strategies take an interest in this part of the market. The lingering question for fund selectors is whether financial debt can flourish even if economic recoveries start to stutter.
Separate ways
It’s been nine months since we last took a close look at discretionaries’ favourite UK equity income funds. Those halcyon days did witness some mutterings about bond proxies, but the overall outlook for dividends was as rosy as could be expected after 10 years of rising payouts.
The events of 2020 soon changed all that, and – as we noted earlier this month – the swathe of companies cutting payments prompted many DFMs to take the axe to their own selections.
How do those changes affect the overall UK income fund rankings? The chart below shows the current ten most popular picks – compare and contrast with November’s favourites.
Threadneedle now sits atop the pile, and the previously discussed resurgence in interest for Troy Trojan Income, and emergence of Franklin UK Income, is also evident. Evenlode Income, too, has continued its steady climb up the buy-list rankings.
Those shifts have come at the expense of Man GLG and Artemis, whose offerings have fallen back into the pack. And that’s the overarching theme of recent shifts: it may not be visible on the chart, but across the sector as a whole there’s now less of a consensus on which funds to buy. This is a trend in keeping with those observed in other asset classes – in fact, it’s only really UK growth selections where DFMs are bunching together at the moment.
Sustaining momentum
Some 92 per cent of UK advisers surveyed by Rathbones say a lack of suitable products is an issue when it comes to ESG investment selection – and four in five find it difficult to match client aims to a specific strategy.
The latter is something with which DFMs, long used to the rigours of bespoke portfolio management, might have some sympathy. Dealing with idiosyncratic demands can be difficult. But when it comes to product supply, the picture is healthier than the survey findings might suggest.
Yes, ESG model portfolios’ rise to prominence was built on the back of a relatively limited number of fund ranges. But the pool of available options has expanded rapidly over recent years, and more and more funds now have viable track records to tout to interested parties.
So while there are commonalities among the underlying funds in wealth firms’ ESG offerings, there are an array of different strategies being used. The question of what makes a “suitable” ESG product will always be in the eye of the beholder. But those wealth firms focused on sustainable fund selection know that it is possible to get things right.
