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US equities have long been the driver of wealth portfolio performance. But the extent of this dominance has caused plenty of angst for allocators in 2020 – even as such stocks help bail out returns after a calamitous first quarter.
There have been plenty of virtual meetings – and column inches – dedicated to this issue in recent months. Questions of whether to shift some money into other regions have featured prominently. But selling up entirely is out of the question for most DFMs. For them, the question is which funds are best placed to prosper in the months and years ahead.
The chart below shows the ten most popular active US equity picks among wealth managers as of this August. It shows a degree of capitulation; value-led strategies like Polar Capital American and Fidelity American Special Situations have fallen from favour. And DFMs’ dedicated income portfolios mean JPM US Equity Income is now well out in front as the top pick in the US fund universe. But there’s more going on than is evident on the surface.
Earlier this summer we saw signs of selectors returning to tried and tested portfolios. With autumn around the corner, that shift has become a little more nuanced. The real go-to area for selectors this year has been passives: their attempts to keep in touch with the rapid rises in US indices in 2020 have tended to involve buying a tracker fund. That’s the reason that most funds in the chart account for a very small proportion of overall assets in the sector. Passives already dominated US equity fund selection, but now they do so more than ever before.
But there’s another side to selection preferences, too: more and more firms are branching out when it comes to the satellite exposures that complement core positions. In the past, this was largely in the form of little-known US all-cap strategies. Increasingly, it’s also encompassing a wider variety of mid and small-cap plays.
The upshot is that some 43 per cent of US equity strategies in our fund selection database are currently held by just one DFM. And as we’ll show later this week, that’s a particularly notable figure when compared with other equity sectors.
A survey from Netwealth on investors’ post-lockdown expectations for their wealth managers has some stark headline findings. Chief among them: one third say they're considering switching from their current provider.
Some 56 per cent of that group said that high fees were a factor in their thinking, with 47 per cent pointing to investment returns. It’s not clear whether the pandemic itself has prompted this shift – periods of poor returns will always lead to greater levels of unrest – but the survey did also reveal an increased focus on digital services, undoubtedly as a result of recent changes.
Wealth firms themselves may well believe that clients tend to be relatively “sticky” in nature: as with bank accounts, thinking about leaving is very different from making such a change. And the survey provides a degree of reassurance on this front. Of those aged 46-50, just 22 per cent are thinking of moving on, a figure that falls to 14 per cent for those aged 51 and over.
Neglecting the younger generations, of course, is simply storing problems up for the future. Resting on laurels might not be an option for very much longer. Monthly Investment Association data regularly confirms that money is moving away from DFM businesses. And the Netwealth survey contains other warning signs.
Older clients may be relatively happy, but richer ones aren’t. Those with more than £1m in assets were the most likely to consider moving: 44 per cent of this group are thinking about switching. And a quarter of those question why they pay any fee at all. Charging structures are a question for management, but for allocators, the pressure is on to deliver returns that can reassure those with itchy feet.
Fixed income managers, and the selectors who hold their strategies, have been content to load up on triple-B rated corporate debt in recent months and years. With central banks acting as a backstop, and worries over the overall stability of such issuers generally coming to naught, that’s proven a sensible option.
Pension funds, however, are finding life rather tougher. Faced with the need to source A-rated assets in a world where few such bonds are available, answers are in short supply. The result, as Axa IM notes, is a wave of money chasing a dwindling pool of options.
Wealth managers might be reassured that these supply and demand factors will help ensure that A-rated assets remain “safe”. What they can’t control is what happens when such bonds get downgraded. Fears that BBB assets being downgraded to junk would spark heavy selling have proven misplaced. But as pension funds account for an ever-larger share of A-rated bond ownership, a similar scenario on this front can’t be ruled out.