asset allocator header image

Asset Allocator

from Asset Allocator

Fund buyers start to diversify holdings as risks mount; Upside surprises fail to placate allocators

Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.

Forwarded this email? Sign up here.

Numbers game

As investor nervousness increases, and returns prove harder to come by, fund selectors naturally start to scrutinise their holdings more closely.

It's true that portfolio performance in 2020 looks like it'll prove better than first feared – though the final two months of the year may have something to say about that yet. All the same, the sudden emergence of the pandemic provided the perfect excuse, were one needed, for DFMs to kick their holdings’ tyres.

As we’ve previously documented, that has prompted reconsiderations in some quarters. And for some it’s the number of holdings, as much as the type of fund, that warrants a closer look. In testing times, selectors are more inclined to say they’re focusing on their best ideas, and making sure every offering can meaningfully contribute to performance.

That’s not quite what’s happened over the past 18 months, however. The average number of fund holdings in a typical moderate model portfolio has risen over that period from 24 to 27.

What’s more, almost 40 per cent of the firms in our sample had added four or more funds to their total holdings over that period. Just five per cent reduced numbers by the same amount, with the remainder unchanged.

Diversifying portfolios in this way suggests wealth firms may have taken the view that uncertainty is simply too great to put all their eggs in just a few baskets. Sell-offs like those seen in March do create buying opportunities, but the rapid recovery shows how quickly those can evaporate.

At the moment, it might feel like only things competing for allocators' attention are stretched valuations or value traps - with little in the way of golden opportunities still available. That's not a combination that lends itself to concentration.

Lower earners

US earnings season continues to create problems for investors – and not just for those flagship companies that miss guidance. It’s those reporting positive results who are arguably more indicative of where the market mood lies at the moment.

Bespoke Investment notes that four in five companies are beating analyst estimates at the moment – a proportion far higher than has been seen for many years. But the reaction to those results has been much more downbeat. Typically, companies that raise guidance see share prices rise by 4.3 per cent over the course of the following day. But the 80+ corporates that have done so this earnings season have recorded an average rise of just 0.2 per cent.

One reason for that may be the growing disconnect between company performance and underlying economic conditions. Economic data has underwhelmed in recent months, and while today’s 33 per cent annualised rise in third quarter US GDP looks eye-opening, this too was already factored in: expectations were for a 32 per cent rise.

Investors’ eyes are firmly trained on the election, stimulus prospects, and a coronavirus second wave. Absent better news on those fronts, companies seemingly face a hard time capitalising on their better-than-expected performance, and their forward-looking predictions are perhaps being discounted as already out of date.

Another death knell

There have been many nails hammered into open-ended physical property funds’ coffins over the past 18 months, but yesterday’s news that the government is pondering how to treat Isas holding such funds is another big problem for the sector.

Isa legislation requires holders to be able to divest or transfer holdings within 30 days, meaning it’s not just future investments but existing positions that are under threat. The government is “considering” whether to allow existing investments to remain within Isas, and will likely permit that if only to avoid a gigantic fire sale. And many of the largest retail positions won’t be held within Isas at all – personal pensions being the name of the game for most nowadays. Nonetheless, this is one more reason why providers may ultimately be forced to put physical property offerings permanently out of their misery.

Get the story behind the stories
The daily newsletter for fund buyers