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The 60/40 portfolio is facing renewed criticism, yet bonds of various stripes are still an essential part of almost every investment manager’s asset allocation. But among UK fund selectors, there’s less consensus on the type of bond fund it’s best to plump for.
Strategic bond funds answer that question simply enough for some, as we discussed yesterday. But those DFMs who allocate across the fixed income universe themselves tend to spread themselves far and wide. A related issue is how they access those opportunities: the chart below shows the share of picks now accounted for by trackers and ETFs.
The standout here is gilts: warnings about duration risk have been widespread for many years now, but almost all UK discretionaries are happy enough to opt for a generic basket of government bonds. And even those who do specifically target shorter duration holdings are pretty content to track an index. If you’re going to hold UK sovereign debt, the consensus is there’s little need to get too choosy.
That all changes when it comes to credit. Unsurprisingly, selectors are particularly picky when it comes to the riskiest parts of the market, like high yield and emerging market debt.
But there’s a similar degree of reticence even when it comes to plain old vanilla corporate bond funds. Just one in five buyers is content to buy the index, and that’s despite few corporate bond strategies having materially beaten their benchmark in recent years. The reason they remain popular is, inevitably, yield: at a time when investors are starved for income, active funds’ ability to produce more income remains paramount.
Pressure to perform
The latest Spiva scorecard of US equity active manager performance is, as usual, not a particularly inspiring take on the sector’s fortunes. Two thirds of all US equity funds lagged the S&P Composite 1500 index over the year to June 30. For your standard large-cap ‘core’ offering, this figure rose to 70 per cent. Marshalling volatility and then keeping up with the Faangs proved a difficult ask, and “most were not up to the task”, as S&P Dow Jones Indices puts it.
UK fund selectors are a little more discerning when it comes to their own US equity picks. Those that do still opt for an active holding – be it core or satellite – have done somewhat better.
Of the large-cap active US equity picks held by DFMs, our own analysis shows that 50 per cent managed to outperform the S&P over the period in question – no mean feat, given the headwinds mentioned above. It’s particularly impressive when you consider there are still several funds held by discretionaries that are value-based, and therefore destined to underperform over this timespan.
Still, DFMs won’t be resting easy: half their holdings may have outperformed, but if the analysis were done on a weighted basis this percentage would fall sharply. It’s the more popular active US equity picks, ie those held by the greatest number of fund selectors, that have struggled of late. Part of this is explained by that residual interest in value. But not all underperformance can be explained away so simply.
Sustain the pace
Speaking of sticking with value: the conclusion of Temple Bar’s tender process has seen it opt for RWC’s UK equity income team as a replacement for Alastair Mundy. No sign here of a shift to a different investment style.
But the previously stated intention to find a manager with a “sustainable value tilt, in the changed environment of pandemic and long term global climate change” is now up for debate. The trust’s announcement this morning repeated the use of the s word, but makes no mention of climate change. That’s perhaps because its new managers do favour the likes of BP and Shell in their portfolios. Either their new trust mandate will have stricter parameters, or the board is happy enough to employ a more liberal definition of sustainable value than many of its peers.