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Asset Allocator

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DFMs debate rotation risks as crowded trades reverse; Selectors shuffle Europe fund picks

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Optionality

The question we posed last Thursday has quickly been answered: the sight of eager investors amassing call options on US tech stocks was not, in fact, a reason for optimism. Discussion of those positions was merely the precursor to a pretty sharp sell-off at the end of last week.

The suggestion that Softbank has become a particularly large option omnivore probably didn’t do much for sentiment, either, given the Japanese company’s increasingly soiled reputation this year.

For now, the pullback remains a blip rather than anything more serious. With US markets closed today, investors will have to wait a little longer to find out more.

But while the Faangs have come to resemble the only game in town, fund managers are increasingly looking at “second-tier” tech stocks as they seek to increase their sector exposure.

UK indices, of course, feature far fewer tech companies than their US equivalents. But there is the odd example – the kind of firm that has both flown under the radar and which is seemingly well insulated from the sell-off as it stands.

For wealth managers, the pertinent issue remains whether it’s time to dial down their current sector, geographic and growth-focused bets in favour of alternative options. The price action of the past few days isn’t enough to materially affect that thinking. But with our fund selection database showing that one in two DFMs now holds a tech fund in their model portfolios – up from one in three last year - stretched valuations will be playing on minds as the fourth quarter approaches.

Reshuffle

European indices do have more material tech representation – and there’s a little more on the way, too. But by and large the rally on the continent has been driven by other factors in recent months, which meant shares were pretty well insulated from last week’s slump in the US.

Still, DFMs are only now starting to dip a toe back into European equities, and average allocations remain very low by historic standards. That’s prompted changes in the fund selection popularity stakes, too. The chart below shows the most popular picks in the region as it stands:

The most obvious shift in 2020 has been the departure of Jupiter European, which has now fallen out of the top 10 entirely – despite performance remaining healthy since Alexander Darwall’s exit, aided by the new managers’ decision to sell Wirecard well in advance of its collapse. There are other casualties: JOHCM Continental European has lost some followers, for one. Even BlackRock European Dynamic, once top of the chart and still one of the strongest performers over all timeframes, has seen a couple of DFMs sell out in recent months.

As that shift implies, many of the changes in the sector have been due to geographic calls rather than portfolio-specific issues. And the relative winners from this process have been income funds and passive products.

Dividend strategies from BlackRock and ASI have actually seen increased interest from buyers this year, the focus on quality perhaps overriding other concerns. For Vanguard and L&G, the thinking is probably a little different. Passives are often seen as a short-term fix, but with sentiment on the region so uncertain, it looks like many wealth managers have viewed the low-cost option as the easiest solution for now.  

Assessing the assessments

Most asset managers’ first efforts at assessing the value provided by their fund ranges are now complete. The result has been a few fund closures, a trimming of fees here and there, and, sometimes, a commitment to do better in future.

Fund selectors will view these outcomes happily enough. But for providers, the stakes look like they’ll be a little higher next year. Research by the Funds Boards Council, as highlighted by Ignites Europe this morning, has deemed more than 70 per cent of UK value assessments to be “superficial”.

The regulator is already reviewing fund firms’ approach to their assessments, and while it’s unlikely to take too stern an approach this year – particularly as it didn’t provide much in the way of guidance in advance of the inaugural assessments – that flexible approach might not last too long. Fund groups might feel like they have to take more concrete action when they repeat the process come 2021.

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