Asset AllocatorDec 7 2020

All change for fund selectors' allocation frameworks; A bond yield test for equity resilience

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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. Click here to find out more, and to sign up - we hope to see you there!

Redrawing the map

Latest information on where fund buyers are moving their money confirms some of the trends we’ve been speaking about this year – and perhaps calls into question the traditional asset allocation framework for 2021.

Figures from the Investment Association show that retail buyers of all stripes, be they advised, D2C, or discretionary in nature, continued to invest net new money into equities, bonds and multi-asset funds in October. Responsible investment accounted for a fair whack of the total, with net sales of £1bn out of an overall £2.5bn. But the most notable inflows came in areas relatively untouched by sustainable practices.

We’ve spoken before this year about DFMs’ burgeoning interest in both China funds and those investing in US small caps. That was reflected in overall retail sales figures for October: the relevant IA sectors both saw record inflows on the month, with net flows passing the £100m mark for the first time in either case.

In total, equity funds took in £450m, driven largely by the £800m+ that sought out funds sitting in the global equity sector. That grouping encompasses both funds that invest across the globe, and those that target specific themes, and its success might be a pointer for 2020. Because the traditional regional asset class favourites all remain subdued at best. UK, EM and Japanese funds all saw net outflows, while inflow figures for mainstream US, European and Asia Pacific funds were negligible.

November may have changed the equation a little: the emerging market optimists are now returning, and buyers may soon start warming to Japan’s latest stock market renaissance once more.

But specialisation – and, conversely, a broad-brush global approach – have both been growing in importance for equity allocators this year. In 2021, as minds again turn to ways of rotating away from US large caps, it may be that themes rather than regions prove the big winners once more.

Holding steady

Recent days have seen government bond yields rise slightly on economic recovery hopes, most notably in the US. Investors, in keeping with much of the Western world, are keen to look beyond a tough winter towards the promise of a better spring/summer 2021.

And when it comes to treasury yields, there’s also the possibility of a new stimulus package to factor in. All of which raises the question of how much is too much: at what point might higher yields start derailing equity market confidence?

Allocators will recognise they’re still a long way from this point: yields are only just starting to rise. And few think the Fed will deviate much from its easing stance until the second half of 2021 at the very earliest. All the same, the sight of falling bond prices does get investors pondering what’s to come.

Gavekal analysts – who have been expecting a rise in yields for slightly different reasons – say there’s still room to manoeuvre for US stocks. The firm isn’t particularly bullish on US equities, but notes that the stock market previously took alarms like the 2013 taper tantrum in its stride. One reason for that, the analysts say, was the gap between the cost of capital and the return on capital. A similar situation is in place today.

While higher equity valuations complicate the picture this time round, the company thinks a 100 basis point rise in 10-year yields could be absorbed by equity investors without much concern. That’s another cushion which could help risk assets in 2021.

A brave face

It’s a sign of the times that the Keystone trust is ending its UK equity focus and aligning itself with Baillie Gifford’s ‘Positive Change’ branding instead. Both ESG and value investing might be in for a promising 2021, but investment professionals are much more confident in the former's chances of success.

That’s a reasonable estimate, given the value theme has little more than a few weeks’ worth of improved fortunes to show for itself this year. In any case, the Keystone decision may have been made prior to that rally.

Ultimately, the move is perhaps also an indication of how much perception matters for closed-ended strategies at the moment. Sticking with a UK value emphasis would have done more to differentiate the trust from the pack – but for many mainstream trusts, the advantages of doing that are outweighed by the existential risks of looking outmoded and behind the times.