DFMs take small-cap surge with pinch of salt; Big get bigger as Baillie Gifford holders keep faith
Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.
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Small wonder
Six weeks in, and 2021 is proving to be a small-cap year thus far. Smaller companies are outperforming their larger peers wherever you look, but it’s in the US that the trend is most pronounced.
Another 2.5 per cent rise for the Russell 2000 yesterday – buoyed in part by price moves in other asset classes – has taken its year to date gain above 15 per cent in sterling terms.
That’s four times the return of the S&P 500, and nor is this entirely a short-term phenomenon. Over the past 12 months the index has almost trebled the gains made by the S&P.
The debate remains the same: whether this is unjustified euphoria, or whether it is a natural response to the prospect of a new economic acceleration.
Earnings season statistics from Bespoke Investment, showing that investors are focused on revenues and less interested in earnings per share, could be used to support either argument. But when allocators read that companies missing EPS forecasts have seen shares rally more than those that have exceeded expectations, they'll inevitably stop and pause.
In the UK DFM world, there’s also a degree of caution at play. According to our fund selection database, 43 per cent of all model portfolio ranges now include a US small or mid-cap strategy among their holdings. And while that number has crept up over the past year (from 36 per cent) there’s not much sign of an acceleration here, either.
New positions are still thin on the ground: of those discretionaries who introduced small-cap exposure during 2020, none did so any later than the summer. The story of a recovering economy and increased stimulus has played out well for smaller companies investors thus far. But it’s not been enough to tempt fund selector holdouts just yet.
A question of trust
The investment trust universe is another that’s continued to flourish in recent weeks. The FTSE Equity Investment Instruments Index, a metric we’ve mentioned before, ended last year up 17.8 per cent, compared with a 9.8 per cent fall for the FTSE All-Share. This year it’s already up 4.4 per cent - three times higher than the main UK benchmark.
Of course, there remain plenty of barriers to entry for wealth managers. Winterflood’s annual survey has long charted these issues, and its latest report confirms that some are growing more significant by the year.
Size, for one, is still a major factor. In keeping with recent trends, last year saw 77 per cent of respondents say they were prepared to invest in a trust with a market cap of less than £150m. This year, the figure fell even further than usual, to 69 per cent. With more than 70 trusts having less than £100m in assets, this stance is still an existential threat for much of the sector.
It’s liquidity worries, rather than size in and of itself, that are often the biggest issue. But few can agree on how exactly things are changing. Three in ten respondents thought liquidity had worsened in recent years, but 42 per cent thought it had improved. As Winterflood notes, this is probably a reflection of how liquidity can vary hugely on a case by case basis.
One final point may also be of note to wealth managers. The broker asked respondents how they felt about Baillie Gifford – very much the leading light of the trust world, as for many model portfolios. And there was little sign of worries here regarding either concentration or valuation.
One in ten were not holders, but half said they're happy to remain as such, and 23 per cent are still net buyers. That left just 6 per cent who said they're net sellers on concentration grounds, and 12 per cent who are selling due to valuations. Most believe this particular story has plenty of room to run.
Gaining speed
We often spend the end of the newsletter discussing M&A trends in asset management. Today is no different – and that’s because Mattioli Woods has put a slightly different spin on things this morning.
The company notes in its interim results that deal activity is particularly buoyant at the moment. In the advisory world, that’s partly because of the number of intermediaries seeking to sell their business and retire. But the company also suggests the rush of activity may be happening “in advance of potential UK Budget changes which could see sellers incurring higher tax burdens”.
Changes to the capital gains tax regime have been on the cards ever since the Chancellor asked the Office of Tax Simplification to look at potential reforms last year. Changes to the likes of business asset disposal relief in next month’s Budget remain distinctly plausible – at the margin, that may well mean deal activity among smaller businesses accelerates even further in the short-term.
