No news is good news for DFMs eyeing US results; No signs of life for equity income funds
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Vote of confidence?
A night that didn’t resolve the biggest question of all has nonetheless brought some clarity to wealth managers. As the US election results continue to trickle in, a win for Joe Biden still looks the likeliest outcome - though confirmation may not arrive for a few days, and president Trump is already pushing for the Supreme Court to get involved ahead of time.
But whoever wins the main race, the Democrats’ probable failure to take the Senate points to more of the status quo for investors: a divided legislature, no outsized stimulus package, no clampdown on tech firms. The recent reinflation trade and all that it entailed – upwards pressure on bond yields, and a better environment for value shares – looks like yet another false dawn.
Some analysts might see this political outcome as a worst-case scenario, bringing neither that stimulus nor the kind of Republican policies that tend to benefit corporate America. But in the short to medium-term, wealth managers’ jobs just became a little easier.
DFMs have largely sat on the sidelines in recent weeks, rather than buying into the prospective return of inflation ahead of time. Some have trimmed government bond positions, but few have materially altered equity exposures. The tech bias is very much still in place.
The lesson of the past few years is that easy monetary policy means investors can still profit from this positioning, even when economic growth looks shaky. There are still big unknowns to be dealt with - potential legal wrangling, the ongoing pandemic, and even the slim chance that the Senate run-offs scheduled for January do end up giving the Democrats control – but all that said, allocators won’t feel too uncomfortable about what’s to come.
Stragglers
Tech and US equity funds may have had a slightly tougher time of it in the run-up to the election, but those aren’t the only areas on which DFMs have been keeping tabs. With the year now drawing to a close, there are other asset classes that have struggled to live up to expectations of late – in particular European equities.
Some analysts thought the reflation trade might have been a boon for the continent’s leading companies, but that wasn’t the case in October. The typical Europe ex-UK fund did worse than its equivalent in any other Investment Association sector on the month.
Firm conclusions can’t usually be drawn from four weeks’ worth of performance, but discretionaries were only just starting to warm to the asset class after its long period out in the cold. In that context, Europe’s recent struggles may have had an outsized impact on their thoughts.
Other parts of the equity universe have continued to flail no matter what the market backdrop. UK equity income funds continue to underperform their growth equivalents; notably, so too do global income strategies – and by an even greater margin.
The average UK income fund is 25 per cent lower this year, compared with 21 per cent for an all-cap growth strategy. But the average global income offering has shed 8 per cent – 11 percentage points more than growth offerings. There may be light at the end of the tunnel in terms of dividend payments, but the performance of underlying shares is yet to show any sign of life.
The strong get stronger
The latest Pridham report ranks BlackRock and Baillie Gifford as the most popular asset managers by net flows in the third quarter, buoyed by their respective strengths in passives and quality growth funds. That much won’t come as a surprise to fund selectors. What’s more interesting is a year-on-year comparison of the top 10 figures.
This time around, four firms broke the £1bn net sales mark, compared with just one (BlackRock again) last year. Yet gross sales suggest the picture now is much the same as it was in 2019, and there’s also plenty of consistency in terms of the asset managers making the top 10s: eight of those in last year’s net sales chart feature again this quarter.
So the net versus gross sales discrepancy suggests the leading asset managers are getting better at stemming outflows at the same time as raking in new money. That may be more confirmation that fund buyers are now rather set in their ways – and happy to continue running their winners.