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Allocators throw the book at unloved stocks; Small-cap favourites start to turn DFM heads

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In the price?

Financial bonds might be rising up the agenda for fund managers and DFMs, but the same can’t be said for financial shares. The sector’s decade-long underperformance has persisted throughout most the Covid crisis. Globally, share price returns remain deep in the red year to date, and second only to energy in the underperforming stakes.

The likes of Capital Economics think these woes could persist even if the virus is brought under control and economies start to recover. The rap sheet’s a familiar one: ultra-low interest rates and financial repression will continue to make life difficult.

No surprise, then, that discretionaries have shown little willingness to buy back into the theme. As with energy, underweighting the sector has become second nature at this point.

That’s despite price to book ratios continuing to plumb new depths, historically speaking. And measurements like these speak to the difficulty facing value managers at the moment – in that no one is paying attention to such metrics. Even the value robots now end up buying Amazon.

But while stories like that may raise a smile, they are also worthy of closer attention. The reason why the AI-driven ETF in question bought Amazon et al is that, in contrast to typical accounting practices, it counts intangible assets as investments rather than expenses. The change makes tech firms, in particular, look more attractive than they appear when using metrics like price to book. 

Not all investors agree that intangibles hold the key to value investing’s revival. But as certain sectors continue to trump all-comers, more allocators might think again about how exactly they gauge the worth of their equity positions.

Small wins

After several years out in the cold, UK smaller companies funds have started to attract more interest from wealth managers lately. A look at small-cap indices wouldn’t necessarily tell you why: the FTSE Small Cap index has outperformed the All-Share and FTSE 100 since the market lows in March, but remains behind both those benchmarks year to date.

Active fund performance, however, tells a more compelling story. The average small-cap fund is more than eight percentage points ahead of its UK All Companies equivalent since the start of 2020, and double that since March.

At the same time, DFMs’ renewed interest has tended to focus on familiar faces – even if those faces are now at new homes. We noted last month that Tellworth UK Smaller Companies had started to appear on buy-lists this year. Its rapid rise, coupled with the fact that UK small-cap exposures remain relatively limited, mean it’s become the most popular individual strategy in the space – though the Merian small-cap team, now at Jupiter, have the greatest combined strength.

Tellworth has today used this platform to launch an all-cap trust. But it’s the smaller end of the spectrum where boutique firms are enjoying the most success at the moment. And this is despite relative performance at the likes of Tellworth and Aberforth struggling in comparison with peers. Small-cap returns are on the up, but it’s reputations of old that are still paramount for buyers.


The suspension of several H2O funds at the French regulator’s request comes a year after the firm made itself a hostage to fortune by vowing to never gate its portfolios. For UK DFMs, the relief comes in the fact that the portfolios in question are, as per last summer, separate from the Multireturns and Multiaggregate strategies that feature in model portfolios on these shores.

But that won’t be much solace, for two reasons in particular. One is that they may still have to field queries from worried adviser clients regardless. The second, more pertinent, issue is that while those funds may remain open, they too experienced severe drawdowns at the height of the Covid sell-off. Multireturns, in particular, shows little sign of recovering those losses. A few DFMs still hold these strategies, but their reputations were tarnished well before the latest news.

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