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Discretionaries swerve a 'new normal' reversal; An acid test for UK equity appetite

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Rude health

One of the big investment themes of the new normal has seen some shine come off it in the past couple of months – but DFMs would be forgiven for failing to notice entirely.

Since September, much of allocators’ attention has been on the tech sector’s wobble. But it’s biotech that has been meaningfully underperforming, more so than tech or, say, the wider healthcare sector. Between mid-July and the end of Q3, in fact, the Nasdaq Biotechnology index shed almost 6 per cent in sterling terms.

Admittedly the benchmark remained 15 per cent higher in 2020 as of the end of the quarter, and normal service has resumed thus far in October. But the majority of wealth managers who play the theme will have found themselves insulated from the dip regardless.

That’s because most of them access the sector via Polar Capital Biotechnology, whose performance has decoupled from indices since the start of the summer. In the third quarter the fund returned 5 per cent, versus a loss of 5.2 per cent for the Nasdaq Biotech. Some of the index’s stumble can be put down to increased nervousness over coronavirus treatments: Moderna dropped by a quarter from its peak in mid-July, while Gilead – the distributor of remdesivir – has similarly struggled after investors turned their attentions to other treatments.

Polar’s team emphasised earlier this year that they were keen to avoid jumping on such stocks. As it happens, their second largest holding – Regeneron – is now in the news and topping market leaderboards for just this reason, given its role in treating president Trump over the weekend. But it’s the fund’s off-benchmark holdings that have really helped it prosper. Top position Argenx, for instance, has done particularly well following successful trials of a drug treating a rare autoimmune disease. Recent times suggest biotech is as volatile as ever – but wealth portfolios have found the right answer for now.

Failure to launch

A fortnight ago, it looked like the opportunities in unloved domestic shares were spurring something of a renaissance for UK equity investment trusts. IPOs from Tellworth, Buffettology and Schroders were all launched in quick succession last month.

Two weeks later and the situation looks like further confirmation of the discrepancy we outlined last Monday. Tellworth has been forced to pull its launch due to insufficient demand. By contrast, in a move that confirms the bulk of the interest remains in the unquoted space, Merian Chrysalis has bumped up its fundraising.

Tellworth may simply have been crowded out: while it was offering an all-cap proposition, the managers’ strengths have historically been in the same small-cap part of the market in which Buffettology also fishes. That said, it remains to be seen whether Sanford DeLand’s launch is any more successful: Tellworth would seem to be a more natural fit for the DFM audience required to get trusts off the ground nowadays. Even that isn’t always enough: the latter, for what it’s worth, said today its proposition had been “well received” by discretionaries.

Schroders might prove a different case, given the money it may be able to draw on from elsewhere in its own business. Its £250m target is a hefty one, but it has expressed an interest in private as well as public equities – a blank slate this time, as opposed to the former Woodford Patient Capital portfolio that the firm's still trying to turn around. Its success, or otherwise, will be an acid test for interest in UK equity trusts both public and private.

Let's get fiscal

One addendum to our look at US stimulus prospects yesterday. It may yet be a bleak winter for the US market, but investors tend to look beyond that point. So the sight of US treasury yields rising to a four-month high yesterday, in anticipation of the stimulus to come in 2021, shouldn’t be much of a surprise.

But if this ability to look past the short-term economic pain persists, it wouldn’t provide much solace for wealth managers – given it could well lead to a change of leadership in equity markets, too.

The important question is whether the Federal Reserve will act to prevent bond yields from rising too high. The situation would be very different from that seen in March: fiscal easing is not the same as the panic that enveloped bond markets in the Spring. But that’s not to say that investors will approach things serenely this time around. It’s an issue to watch for wealth managers in the weeks ahead.

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