What DFMs did during markets' breakthrough moment; ESG allocations extend their reach
This is the last Asset Allocator of 2020 - we'll return in January.
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Shifting sands
Amid all the talk of a market rotation, what have DFMs done in response to recent share price surges? Our analysis of the industry’s November allocation calls points to both familiar moves and some more unusual developments.
The first conclusion is that vaccine developments weren’t treated as a true inflection point. For every DFM that made a change to their models on the month, there was another who left things exactly the same, according to our asset allocation database. And those who were making adjustments have fine-tuned things rather than overhauling their strategies.
Views were mixed on the market that’s driven global returns this year – US equities. Our database shows the majority of wealth managers were content to keep balanced model exposures at their target weight, or let them drift higher as markets enjoyed another leg up in November. One in five DFMs did pare back positions slightly, but that wasn’t enough to prevent the average US weighting climb higher once again.
It was a different story for domestic equities. There’s been little sign of a rush to buy on the back of November’s surge, but UK positions are clearly being viewed with more warmth now. Three quarters of wealth managers either let their exposures rise in line with market moves or actively added to them on the month.
There was also evidence of renewed interest in emerging markets, as equity positions in general moved higher.
These were typically funded by cash piles: the average cash weighting dropped back notably on the month. But it wasn’t just liquid assets: a handful of wealth firms also took the opportunity to reassess their alternative positions, and not necessarily in the way you’d expect. Gold was a perhaps inevitable victim of the more positive mindset, but it was the uptick in alternative income exposure that was most apparent. Even in times of relative plenty, discretionaries are still thinking about how best to diversify their strategies.
Sustaining the momentum
There’s no doubt 2020 has been a(nother) breakthrough year for ESG investing. Increasingly, wealth managers are considering how to factor in sustainable approaches across the board. But for now, their underlying fund selections tend to focus more readily on areas like equity and credit, meaning there are still a few gaps to be filled when it comes to other asset classes.
Government bonds are one such example, as per the Asset Allocator webinar discussion that took place earlier this month. Speakers from iShares, Beyond Ratings, FTSE Russell and LGT Vestra examined how bond investing might change in future.
There have been a spate of notable headlines on this front of late – from the UK’s issuance of green gilts to the EU Recovery fund’s requirement for green bonds to form a part of its own issuance.
Part of the problem for fund buyers and providers is that developing sustainable sovereign indices is difficult, given the lack of consensus on which ESG issues really matter, and on the underlying approaches of the countries involved.
A focus on climate issues can help resolve the first problem, according to iShares. Even then, an inclusion/exclusion approach isn’t really viable, so there’s plenty of assessment required in order to tilt such strategies in the right direction.
From the fund buyer’s perspective, one further impediment is the way that such funds might alter their asset allocation. The risk/reward equation might be the same, but many buyers still tend to focus on single-country government bond funds, in the main focusing on either gilts or US treasuries. A global approach is less common - but that may change in future if the need to incorporate ESG across entire portfolios becomes even more important. In any case, questions like these further emphasise that selectors will have to up their due diligence if they’re to flourish in a world of sustainable investing.
Adding value?
To return to a familiar debate for one final time this year: on the basis of December performance, there’s good reason why DFMs are yet to rush to value funds. After outstripped growth indices in November, value benchmarks have more or less reverted to type this month. The MSCI ACWI Growth benchmark is up 2.9 per cent in December, compared with a rise of 0.7 per cent for the value equivalent. It’s a similar story in the UK, where the value style has posted half the return of growth.
One month of underperformance isn’t enough to write off this recovery, any more than one month of rapid returns is a reason to believe things have definitively changed. All the same, after so many false dawns in recent years, wealth managers will be wary of making the same mistake again. It may take more good news in 2021 to get discretionaries’ own rotation going in earnest.
