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Questions emerge for buyers' Big Four UK equity picks; Dollar indecision returns for EMs

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Lonely at the top?

Fund managers, like fund selectors, are yet to truly warm to UK equities despite the market’s potential to act as a happier hunting ground for investors this year. But there are suggestions that buyers might be reconsidering their existing positions.

December typically isn't a busy month for chopping and changing fund holdings, and last year was no exception. But Morningstar flow estimates do flag one or two notable shifts regarding UK equity strategies.

We’ve spoken in the past about how just four UK equity funds account for an outsized portion of DFMs’ UK equity preferences. Of these, both Lindsell Train UK Equity and a resurgent Man GLG Undervalued Assets took in money last month.

But the others – Liontrust Special Situations and Ninety One UK Alpha – saw rare outflows. The fifth most popular UK equity strategy among wealth managers, JOHCM UK Dynamic, also saw an estimated £174m leave. By this metric, the trio ranked as three of the month’s biggest strugglers from across all fund sectors.

In a world where buyers occasionally move allocations from unitised funds to segregated mandates, redemption estimates like these don’t necessarily mean money is leaving strategies. And short-term performance hasn’t yet been unduly affected by a nascent market rotation: both the Ninety One and JOHCM funds beat the FTSE All-Share in the final two months of last year.

But even if selectors aren’t yet ready to move back into the UK in their droves, some will be starting to consider whether their go-to choices of recent times are the right ones for the months and years ahead. It may be the UK fund favourite rankings undergo something of a shake-up this year.

Dollar doubts

Last week, confirmation of a US blue wave of sorts was seen as adding to the pressure on the dollar. Fast forward a few days and some are reconsidering those calls.

After many false dawns, the greenback did finally start to struggle at the end of 2020, dropping 5 per cent in the last two months of 2020. That meant many were happy to return to their calls of yesteryear and tip the dollar to fall further in 2021.

But the reaction to the Democrats’ success in Georgia hasn't been quite as expected. Expectations of more stimulus were tipped to weigh on the currency. But others note that fiscal firepower will stoke the recovery – and as a result, are starting to wonder what the Federal Reserve will do later in the year.

Most allocators would acknowledge that the Fed’s been clear it will look through inflationary pressures in the short term. Investors, however, like to look further out. And there are voices that say a stimulus and vaccine-led recovery will call into question the central bank’s preferences by the second half of this year.

For UK wealth managers, the biggest impact of this shift might be on emerging markets. EM equities have been tipped to perform well this year, as has EM debt. Needless to say, the latter asset class is particularly sensitive to the changing fortunes of EM currencies.

The potential for volatility here will never be far from the minds of fund selectors. For now, they'll probably think that the prospect of a roaring recovery is still too far away to provide genuine support for the dollar. If and when it does arrive, it will at least a nice problem to have.

Filtering out

DFMs’ increased willingness to try out thematic equity funds was a feature of 2020, and research from Cerulli suggests providers have little doubt the trend is here to stay.

That's often the case with distributors, of course: quick to cotton on to existing trends and slow to recognise when the environment is changing. Either way, 84 per cent of the ETF providers surveyed said they expected to see decent demand for thematic strategies over the next couple of years across Europe.

And while technology and biotechnology inevitably featured prominently in their thoughts, there was particular consensus on water-themed ETFs: some 92 per cent think demand here will increase over the period.

This is a specialisation that hasn’t yet trickled down to UK wealth managers – not to the same extent it has elsewhere, at least. Our fund selection database shows that even dedicated ESG portfolios have little exposure to this exact theme. So while it’s true there’s plenty of room for growth, what’s less certain is whether UK buyers will get involved.

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