DFMs diverge over 2021 asset allocations; Pendulum swings back for regional fund picks
Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.
Forwarded this email? Sign up here.
Holding fire
New year, new asset allocation? Not just yet. Our latest analysis of DFMs’ model portfolio positions showed they continue to take a cautious approach to markets’ would-be regime shift.
In December, things were much as they were the previous month: a handful of wealth firms opted to shift their allocations with a view to better times ahead this year, but many have decided to stay put for now.
Unsurprisingly, the average balanced portfolio allocation does have a higher proportion in equities now than it did two months ago. That shift continued in December as it had done in November, as did the gradual draining of cash piles.
There wasn’t much consistency in how exactly this money was invested, however. Emerging markets do continue to see interest rise from a variety of buyers. But sentiment remains pretty mixed when it comes to other regions.
As in November, there were again signs of some DFMs upping their UK equity exposures. Equally, one wealth firm opted to dial down their domestic bias further, in favour of more specialised thematic plays.
In total, more than 40 per cent of DFMs in our sample have yet to materially adjust their allocations since the early-November vaccine news.
Will that stoicism last? Yesterday we reported on Bank of America’s global fund manager survey, which showed the consensus start date for a vaccine-fuelled recovery had been pushed back several weeks. But the European version of the survey reveals a slightly more positive stance: it showed an increasing number of managers now think the shift to value and small-cap plays is likely to be sustained throughout 2021. If selectors start thinking the same, they may begin rotating portfolios more aggressively in the weeks to come.
Hidden GEMs
One point of interest amid the return to EM equities is how exactly buyers are tapping this theme. We’ve spoken in the past about fund selectors' increased preference for Asia ex-Japan funds at the expense of broader GEM offerings. There are signs that has started to reverse in recent months: those who are buying in are looking at now looking at the latter, not the former.
That’s understandable from a valuation perspective – EM funds have lagged behind the Asia specialists for a while now. Returns underline this: last year alone, the average Asia ex-Japan fund made 27 per cent – twice that of the average emerging markets offering.
Our recent look at fund firms’ own Q1 outlooks shows a similar shift in emphasis. For the first time in many months, more are positive on emerging markets than they are on Asia specifically.
There's still a compelling case to be made for the structural strengths of Asia, particularly when big chunks of the wider EM universe, like Brazil, are still battling severe Covid-19 issues.
Conversely, these strengths might ultimately hinder some Asian economies. As the Wall Street Journal notes today, those countries that have made a good job in staying relatively virus-free will face tough calls later in the year, once vaccines have rolled out more widely in developed markets.
Many Asian economies' own vaccine plans are less advanced: they have the luxury of playing wait and see to an extent. But at some point, they will have to kickstart their sizeable tourism industries: borders can’t stay shut forever, after all. Gauging whether to open up without vaccinations, in order to take advantage of the recovery playing out elsewhere, will be a difficult decision. The pace of reopening will be a challenge for all economies, but the stakes may be higher for certain parts of Asia – by virtue of their resilience thus far.
Slow road to recovery
There may be signs of life on the capital growth front for equity income funds, but in the UK the dividend outlook remains pretty gloomy. That’s the view of Link, which says payouts are unlikely to recovery to pre-pandemic levels until 2025.
As that implies, the prospects for dividend growth, as much as absolute dividend levels, remain dim.
Link’s dividend monitor predicts 10 per cent growth this year in a best-case scenario – an outcome that would happily be accepted by managers and selectors alike. But its worst-case scenario is another year of contraction, albeit only by 0.6 per cent this time. Managers may be on safer ground pointing to starting yields and prospects for capital growth for the time being.
