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Asset Allocator

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A post-mortem on wealth firms' year of chop and change; The big contrarian rotation for 2021

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All change

It’s been a dramatic 2020 for all investors, but wealth managers could yet end the year as they begin it.

With some asset classes now back at pre-Covid levels, and vaccines hinting at an eventual return to the ‘old normal’, the overarching questions look pretty familiar.

Talk of crowded trades and potential rotations relates to the same parts of the market as it did in late 2019. There may yet be another Brexit breakthrough to increase the sense of déjà vu.

Even so, the trials of 2020 have prompted plenty of tinkering with portfolios. Based on the thousands of holdings that sit across all the MPS ranges catalogued by our databases, the chart below shows how many of those funds were either added to portfolios or sold out of entirely in 2020.

There are two themes that stand out. The first is the overhaul of global and specialist equity allocations that we’ve discussed at length already this year. The second is the bond fund buys and sells.

As the chart indicates, a third of all corporate bond or high yield positions have been turned over this year, driven by DFMs’ rush to capitalise on the sell-off. Government bond holdings have also seen significant levels of churn: much of this has been about swapping between short-dated, inflation linked and traditional sovereign debt positions.

In equities, the lack of interest in altering Asian positions, a sentiment we discussed yesterday, is clear. So too are the relatively high levels of turnover in both UK income and UK growth holdings: even accounting for the storms facing UK equities in recent years, it’s rare to see this level of activity in such a mature asset class.

Japan has seen even higher levels of turnover: notably, in a year when its indices have performed well, most of these alterations have seen DFMs sell out of positions entirely. With the benefit of hindsight, that looks like a mistake. But there have been bigger calls than Japan to be made this year, in conventional asset classes and elsewhere. Tomorrow, we’ll look at whether DFMs have been similarly active with their alternative asset positions.

On the brink

Bank of America’s analysis of its latest fund manager survey puts it in, or near, the “good news is almost all priced in” camp.

The bank says the point of peak positivity is on the horizon, and advises investors to “sell the vaccine” in the coming weeks or months. Average manager cash levels are now at 4.1 per cent, below the pre-Covid level of 4.2 per cent, and optimism on global growth and profits is at a 20-year high.

The moment to pull back, it believes, will be when the likes of Europe and UK cyclicals and energy stocks join in the rotation to EM, small cap, banks and value that’s already underway.

Many wealth managers might disagree with the assessment that an end to euphoria is near. But some of the BofA charts do look pretty compelling. Expectations of a steeper yield curve are at an all-time high, as is the proportion of managers who think small caps will beat large caps in the coming months.

There’s not quite the same bullishness on value vs growth – expectations there are only back to where they were in late 2019, late 2018...late 2017, and so on. But an overall change in thinking is clear. Some 50 per cent of respondents think emerging markets will outperform in 2021; the next most popular choice was the S&P 500 on a mere 22 per cent.

This, again, is reminiscent of where investors were 12 months ago. The calls to diversify away from the US – or from US large caps at least – are only likely to grow louder from here, whatever happens with vaccines. Given these shifts, BofA says the contrarian move would be to back staples for 2021. Only time will tell whether it’s the bank, or investors as a whole, who’ve gotten ahead of themselves.

Tesla triumph

There was another big market event yesterday that had nothing to do with healthcare. Tesla is to belatedly join the S&P 500 in five week’s time, a decision which sent its share price up another 14 per cent.

There lies the influence of index creators in the modern age. Bloomberg’s John Authers noted this sole action meant the S&P 500 selection committee had more influence on markets yesterday than Moderna did “by inventing a successful vaccine against a global pandemic”.

Tesla’s weighting in the index will amount to around 1 per cent, which will be neither here nor there in terms of how either passive or active managers’ individual portfolios change in response. But it does mean the company joins the four fifths of the Faangs, Microsoft and Visa among the top 10 companies in the S&P. For wealth managers, the change is illustrative of how tech – for better or for worse – is increasingly dominating US indices.

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