Prepping portfolios for a 2021 paradigm shift; Fund selectors' biggest concentration risk
A quick announcement: Asset Allocator will be holding a webinar for wealth managers, asking whether DFMs' ESG allocations are fit for purpose, on December 9.
To find out more and to sign up, click here.
An easterly wind
The US dollar index touched multi-year lows this morning, but some analysts suggest it’s another currency that is having a bigger impact on portfolios at the moment.
With said dollar index now at its lowest level since March 2018, allocators are wondering whether the long-forecast period of weakness for the greenback might have arrived at last. Yet it’s the Chinese renminbi that is having just as much influence on world markets at the moment, according to analysts at Gavekal.
The renminbi has outperformed all other major currencies so far this year, a "paradigm shift...[that would have] important investment implications”, according to the firm. That’s in no small part because the analysts see a rise as being both an inflationary input into the world economy, and a boon for other Asian currencies.
There are also implications for more mainstream assets – like bond yields and energy stocks, both of which the research house thinks should rise on the back of the renminbi’s strength.
Questions of cause and effect loom large here: is it the renminbi that’s driving the likes of energy higher, or the belief that vaccines will help bring about an economic recovery? Most would say the latter. The same reasoning would apply to value stocks, even those such shares' moves have also been correlated with the currency over recent years.
In the case of bond yields, Gavekal says “Covid lockdown fears” are providing support for prices for now. That’s an easy enough get-out – another might be central bank support, which will prove harder to dislodge.
But even if this is the case, there’s still the impact on currencies to consider. If higher Asian currency valuations are sustained, that would have an impact on import prices in the developed world. It’s perhaps too soon to be considering the impact of an inflationary surge. But dollar weakness – and resultant strength elsewhere – would give more food for thought on that front.
House risk
Investors’ enduring preference for quality growth investing has shown signs of wobbling recently, but it will take much more than the current stutter to erase years of rising returns.
And needless to say, the investment style’s dominance has been of particular benefit to some fund houses – none more so than Baillie Gifford. The company’s equity funds have roared ahead, and the firm now dominates DFM buy-lists like no other.
This ascendancy isn’t solely due to favourable winds: funds like its Japanese offering have long been established fixtures. More recently, the fund house has derived particular success in two other areas: ESG, and strategic and high-yield bond strategies. The upshot is that its funds are now among the 5 most popular in seven of the 15 main asset classes tracked by our fund selection database.
Its weakness remains the UK – which accounts for three of the eight asset classes in which the firm doesn’t have a material presence. And in terms of themes, equity income has historically been a gap. That could yet change now its responsible global income offering is ticking some boxes for wealth managers, but growth remains the company byword.
All the same, as its influence increases, DFMs will be aware that they can have too much of a good thing. Baillie Gifford's dominance isn’t quite so pronounced on a buyer-by-buyer basis: there’s still a sizeable minority of DFMs who don’t have any exposure to the company across their models. For others, this particular concentration risk is worth keeping an eye on.
Up for grabs
Standard Life Aberdeen’s planned disposal of Parmenion might prove another sign that wealth manager consolidation is accelerating again. Equally, it could yet be the case that this particular move increases rather than decreases competition.
Parmenion is consistently among advisers’ top-rated DFMs – running its own platform is a particular benefit on this regard – but there’s no doubt there’s a fight to get noticed at SLA. The company is, after all, home to another DFM and two other platforms, all of which carry the main brand.
So while running Parmenion at arms length made sense, with the benefit of hindsight it was arguably never a long-term solution. The question is what comes next: £6.5bn of AUM could be swallowed up by a big business, acquired by private equity, or merged by a mid-tier player looking to make the step up. As ever, all would present integration challenges. But if the deal adds some clout to an established brand it might make rivals look over their shoulders.
