Squeezed middle creates problems for wealth portfolios; UK buyers strive to keep their balance
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Squeezed middle
Equity investors’ optimism has strengthened further in the opening days of 2021, fending off another barrage of risks to their thesis in the process.
Take US politics: back in October a prospective ‘blue wave’ was viewed with relative enthusiasm – only for November’s result to see many commentators suggest a divided Congress was actually the optimum outcome. But Democrats took control of the Senate last week, and benchmarks rallied once again as a result.
There is a logic to this have-your-cake-and-eat-it approach: it was tech shares that rallied most on expectations that the status quo would continue, while value and small caps benefitted last week from the prospect of increased stimulus packages. All the same, there is a problem here for allocators when looking at their US positions.
That’s because shares in the middle of the pack are losing out, relatively speaking.
The cheapest stocks are bouncing as part of a reflation theme of sorts. But that isn’t causing investors to rotate out of the most expensive tech names – if anything, more and more investors are biting the bullet and deciding they can no longer afford to miss out. Even an uptick in bond yields has done little to derail these shares’ rise.
Different market participants are making different decisions here – from hedge funds to retail investors and all those in between. But the net result is the same: both cheap and expensive stocks are rallying, and the middle ground is lagging behind. Some analysts have already pointed to the likes of Microsoft as a case in point; its share price has gone nowhere since the Autumn. For UK wealth managers, it’s evidence that ‘sensible’ options – like those fund managers who take a blended approach – may require patience at the moment.
Playing it safe
Official fund sales figures for November have confirmed the initial findings made last month: news of effective Covid-19 vaccines prompted a record period for active fund inflows, with UK equity funds one of the sole exceptions.
Investment Association data also confirms another point we discussed in December: that many investor preferences remained more or less the same.
Global equity funds, for example, capped a strong 2020 by taking in a record £1.7bn in net flows in November. In future, it might prove easier to see exactly what kind of purchases are driving global flows – should the IA’s proposals to break up the Global and Specialist sectors pan out. Either way, it’s clear that the interest in global or thematic propositions remains stronger than ever.
But the IA figures also reveal some less obvious trends. In contrast to some previous periods of optimism, multi-asset funds were a particularly big beneficiary this time around. And the popularity of these strategies wasn’t governed by their equity allocations: the 0-35% and 20-60% Shares sectors were bigger beneficiaries, proportionally speaking, than the Flexible Investment category.
That emphasises the degree of caution that still abounds among UK investors, even if other categories that cater for the more prudent investor – like Absolute Return or even Strategic Bond funds – saw net outflows on the month.
US equity markets may be split between the leaders and the laggards, but even in a euphoric month like November, balancing risks is still at the top of the agenda for domestic allocators.
Comeback trail
The turn of the year means crystal balls have been consulted and predictions made, and some familiar themes have emerged for the wealth and asset management industry. Merger and acquisition activity is never far from business heads’ minds, and things are no different in 2021.
The early signs are once again promising – from dealmakers’ point of view, if not fund selectors’. A transfer of funds from Smith & Williamson to Sanlam was announced last week, though that won’t have much impact on fund buying processes. Of more interest is the news that Martin Gilbert is back on the consolidation trail. He reportedly sees AssetCo as a means of consolidating a series of businesses – and said at an FT event last year, as Ignites Europe notes, that he would rather do “10 small deals than one big deal”. Given the state of some of the smaller players in the asset management sector, there is plenty of scope for that to play out. Whether the outcome is a viable investment manager of interest to professional selectors is another question.
