Markets' shot in the arm brings new challenges for DFMs; Wealth portfolios double down on cash
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Priced to perfection?
November has already proven a tale of two rallies: last week’s was based on a continuation of the status quo, today’s – based on a possible Covid-19 vaccine breakthrough – is anything but.
The results are about as good as could be expected at this stage. The flu vaccine has an effectiveness rate of around 30 per cent; FDA rules in the US, deemed to be among the strictest in the world, had set the bar for a Covid vaccine at 50 per cent. Today’s announcement of a 90 per cent rate sails past those thresholds, at the very least.
The market reaction has been as sharp as you’d expect: in the UK, IAG is up 30 per cent, and pub companies are up by a fifth. In the US, tech is lagging, and Zoom has dropped by more than 10 per cent in pre-market trading.
In sum, the rotation that many DFMs had considered in anticipation of a ‘blue wave’ last week has materialised just a few days later: small caps, oil and safe haven bond yields are all up markedly.
All the same, moves like this will give allocators pause: has all the good news been priced in in a single morning? And what are the chances of disappointment down the line? The announcement was delivered via press release, rather than a peer-reviewed study, and investors have already been warned that the distribution and rollout of a vaccine might verge on the arduous. The Pfizer/BioNTech vaccine, for instance, has to be stored at temperatures of -80C.
But with even the scientific community expressing optimism over today’s results, the possibility that this really is a major achievement for humanity shouldn’t be dismissed. Deciding on how best to position for the months ahead just became much harder. But for once, investors might not mind too much if they end up being behind the curve.
Cash stash
From euphoria to caution: elevated cash weightings have proven a feature of both wealth and fund manager portfolios for many months now – even prior to the pandemic.
Some might have been saving their firepower for a day just like today. Be that as it may, it’s worth taking another look at the extent to which DFMs have been doubling up on their cash holdings.
The chart below shows the average cash weighting for all active growth funds across a variety of Investment Association sectors, versus the typical weighting among the funds most popular with discretionaries.
At this point, it’s instructive to compare the table with the one we produced almost two years ago. Back then, it was evident that wealth favourites held more cash than the typical fund – in almost every region.
This time around, things have got a little more nuanced. In Europe and Emerging Markets, DFMs’ picks now hold less cash than their peers. In the UK, too, fund favourites have got a little less cautious.
In Japan, by contrast, the situation’s reversed: perhaps a sign that the optimism of early 2019 has withered away somewhat among the most popular managers in the region. Moves like these show that DFMs’ favourites continue to be more cautious than the typical portfolio – or, alternatively, that they’re much more willing to take active bets, on cash as well as on individual stocks.Â
Oil shock
The move by Scottish Widows to dump £440m of assets that fail to meet its ESG requirements is an eye-catching one, even if that figure amounts to just 0.3 per cent of the company’s assets under management.
It’s moves like these that make investors ponder whether the growth in exclusion policies is becoming an active constraint on oil and gas share prices. Even those who don’t buy into the ESG story have started to think something similar: if everyone else views them dimly, it may prove hard to make money.
Today’s ‘reopening trades’ are a possible counterpoint to this narrative. Oil prices, as mentioned above, have rallied sharply on the vaccine news. The size and duration of that rally are still up for debate. So too is the question of whether a return to ‘normal’, and renaissance for cyclicals, will extend to natural resources et al.
