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Allocators keep an eye on Goldilocks' return; Wealth managers divide up passive plays

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Just right

Amid all the talk of market rotations and new and old normals, one thread remains constant for equity allocators. As the latest Bank of America fund manager survey notes this week, hopes for a ‘goldilocks’ economic environment are rising high once again.

This backdrop – where growth is neither slow enough to inhibit companies, nor fast enough to convince policymakers to reign in their largesse – is the one which helped equity markets scale new heights over the past decade. Could a similar story be on the cards for 2021?

If so, it’s true to say there are slight differences this time: the growth rebound now anticipated by most investors could well be very fast indeed. But they have the confidence that central banks will be happy to look through this shift for longer than in the past.

With that in mind, a change in investors’ emphases – like a rotation into emerging markets, small caps and value stocks – wouldn’t fundamentally alter the equation. That’s a scenario worth pondering for those considering junking quality or tech stocks: after all, the BofA survey shows that tech overweights remain in place despite the recent shifts. All boats could yet be lifted by the rising tides of 2021.

There is one cloud still on the horizon. The proportion of managers expecting a steeper yield curve has reached a record high this month – above those seen during the financial crisis or 2013 taper tantrum.

Talk of higher rates is also on the rise once more; nerves are already starting to set in among some market participants, particularly as signs of a breakthrough in US stimulus talks emerge. The Fed seems resolute enough in its commitment to tolerate higher levels of inflation. But if things progress as expected, that resolve will be tested before the first half of 2021 is out.

On track

As mergers go, the potential amalgamation of State Street’s $3trn asset management arm would mark another escalation of recent M&A trends. The business is the third-largest fund manager in the world, and twice as big as LGIM, the largest UK fund group. Potential acquirers would need to have pretty deep pockets themselves.

Of course, even $3trn isn’t as big as it once was. The Vanguard Total Stock Market Index fund itself now has more than $1trn in assets, making it the first strategy in the world to pass the 13-figure mark.

The rise of this particular US equity tracker underlines the role now played in the investment universe by passive products. But the strategy isn’t quite as straightforward as it first seems – in structural terms, at least.

The fund has both open-ended share classes and an ETF share class, giving it a flexibility that’s unrivalled by most offerings on these shores. UK wealth managers won’t be too fussed, however. Their passive exposures tend to divide up rather neatly depending on where a strategy sits in an asset allocation framework.

The core building blocks are still mainly index funds. ETFs, by contrast, tend to be used for smaller, niche or more short-term exposures.

Those wealth firms running unitised funds are happier to hold ETFs, for reasons with which allocators will be familiar, but for model portfolios it’s a much more ad-hoc affair. And those preferences are likely to continue, whatever the shifts in provider ownership or fee wars that occur over the coming months.

Staggering on

One consequence of the low interest rates that have aided investors over recent years is the rise in ‘zombie’ corporates. New research from the New York Fed suggests this isn’t such a problem after all, providing bankruptcy and restructuring processes are swift enough when the axe does eventually fall.

Low rates have also bailed out plenty of fund providers during the past decade; for an industry undergoing fundamental change, and for all the M&A activity that’s out there, there are plenty of small underperforming firms that have stayed in business for longer than might have been expected.

Some of these companies are stuck in a strange limbo: not attractive enough to find a buyer – even a buyer for their assets – but not struggling quite enough to be put out of their misery. Like zombie corporates in general, they too are likely to linger on for a while yet.

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