Allocators' vaccine vacillation, fund flow distortions on the up, and a howl of disapproval
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Follow the leader
The latest Bank of America fund manager survey confirms what everyone’s thinking: a record four in every five managers now agree that most crowded trade in the market is long tech. The only surprise is that this proportion isn’t higher.
But this recognition isn’t leading to a reassessment of geographic priorities. The survey notes investors are looking again at different sectors and other parts of the market cap spectrum. Yet there’s little evidence of a regional rotation away from US shares, according to BofA.
That's because, even though investors are gradually growing more optimistic on the economic outlook, they’re still awaiting a real catalyst for change. That's unanimously agreed to be the arrival of a Covid-19 vaccine: those surveyed imply that only this outcome will prompt rates to rise, tech to suffer and, perhaps, a rotation away from the US.
And there’s still plenty of optimism on this front: 71 per cent of managers believe a credible vaccine will be announced by the end of the first quarter of 2021. Until that point, the survey suggests, things are in a holding pattern. In markets as elsewhere, many feel the priority is to get through the winter and then reassess.
Not all investors agree with those assumptions. Argonaut’s Barry Norris, never one to shy away from a provocation, thinks a vaccine would at best be mitigative, and may not ever arrive anyway. The past six months have, admittedly, turned half the world into armchair epidemiologists, and these opinions are sometimes driven as much by politics as they are by science. But allocators should give credence to the possibility that nothing much will have changed come Spring. The holding pattern could yet turn into something more permanent.
Hot money
August, when trading desks are on holiday and liquidity is in short supply, is often the time when unusual market moves materialise. And the same is true for fund flows.
Data from Morningstar suggests a relatively limited amount of buying and selling activity last month – no surprise, given the time of year and the holding pattern mentioned above. But that does mean that isolated events can have an outsize impact on sector flows. So the significant inflows enjoyed by two funds last month – the iShares Global Property Securities Index tracker and the Schroder Gilt and Fixed interest fund – were enough to propel their respective sectors to the top of the popularity charts.
The same trend can be seen at the bottom end of the scale: just two funds accounted for virtually all the absolute return redemptions on the month.
Fund selectors are no stranger to these events: for a long time, withdrawals from M&G Optimal Income appeared to suggest that the Strategic Bond fund sector as a whole was wholly out of favour. And there are exceptions to this rule, even in quiet months: continued redemptions from UK equity strategies are still widespread, rather than confined to the odd straggler. But if more DFMs, like fund managers, are now content to wait patiently for a change in sentiment, buyers can expect to see big fluctuations in sector-by-sector figures in the coming months.
Hounds howl
Bestinvest’s bi-annual ‘Spot the Dog’ list is a stick with which to beat fund managers: despite something of a cull in recent years, there are still too many underperforming funds. The latest report highlights that many of those strategies are still home to plenty of investor cash: the median size of the 160 funds included is £133m, and 18 hold more than £1bn in assets.
While DFMs will be happy to note that very few of their preferred selections feature this time around, they’ll also recognise that underperformance – even over the medium term – is sometimes out of a fund manager’s hands. That’s particularly the case right now, given value has spent so long in the doldrums.
At the same time, the behemoth stragglers do represent a problem for the asset management industry. It’s easy enough to close or merge away small or even medium-sized portfolios. But larger funds that fail to meet the grade are unlikely to face the same penalties: fund firms are naturally more lenient in their views when there’s billions of pounds of assets that are at stake.
Greater investor awareness, and a clampdown of sorts on legacy holdings and legacy fees, have helped naturally reduce some long-term laggards’ asset bases. But there’s still too much money in funds that aren’t delivering the goods, and it’s not clear whether that will change in the near future.
