Little sign of light for DFM income portfolios; Investors warm to fund selectors' most hated sector
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Payout patience
After a year in which dividend payouts were ravaged by the pandemic, it’s no surprise that the latest bi-annual Sanlam income study has seen some notable rankings shifts over the past six months. And it's been a depressing story for DFMs' own income strategies, too.
Three months ago, we predicted the typical DFM income model portfolio would yield less than 3 per cent by end of 2020. In the event, such strategies narrowly avoided that fate – the average yield, according to our analysis of such portfolios, sat at exactly 3 per cent as of December 31.
That represents another notable quarterly drop, from the 3.2 per cent recorded at the end of September. We should once again mention that these are trailing 12-month yields: that means they're backwards looking, but it also means that many of the problems of 2020 are still being worked through.
For balanced models, it’s a similar story – though in this case, trailing yields must surely now be bottoming out. That's because the average now stands at just 1.3 per cent, down from 1.45 per cent last quarter. There's little left to give on this front.
To put this into context: just nine months ago, the figures for income and balanced portfolios were 3.7 per cent and 1.8 per cent respectively. Needless to say, the events of last year came as quite a knock to income seekers.
For those who have managed to reset expectations, is there light at the end of the tunnel? Unsurprisingly, data from FE shows just one UK equity income fund, Man GLG UK Income, managed to grow its monthly payouts year on year in the fourth quarter of 2020. Those needing yield will have to wait a little while longer before such growth returns across the sector.
Under resourced
The return of inflation may be more of a spectre than a reality as it stands, but predictions of a new dawn have given renewed confidence to those investing in the commodity complex.
A lengthy FT piece this week begins by noting that Goldman now believes the recent recovery in prices is “the beginning of a much longer structural bull market”, rather than a mere rebound.
That remains very much a minority view, but few could deny the strength of the initial rally. Many resources have already rallied hard for several months now – almost every tradable commodity, in fact. The FT notes that all 27 commodities in a futures basket tracked by fund firm SummerHaven posted positive returns over the past six months. On a 12-month view, copper is up 60 per cent and oil is also comfortably back in black (as it were).
Yet for wealth managers, the sector remains arguably the most hated of all. Setting precious metals aside, our fund selection database - tracking 50 DFMs' model portfolio ranges - shows one solitary purchase of a commodities strategy over the past three years.
The post-March period last year, when prices first started to rally, in fact saw a couple of discretionaries opt to divest long-held positions in the likes of JPM Natural Resources.
Of those who have held onto older positions, none accounts for even two per cent of their most aggressive portfolios. More so than the US small caps we spoke about yesterday, more so than any other asset class, this is one part of the market that remains off limits for most fund selectors.
Managed separation
Analysis of active funds’ 2020 performance from Scope Analysis shows it’s not just DFMs doing a good job when it comes to European equity positions. We reported last month that fund selectors’ European favourites were almost all ahead of the curve in 2020. Scope’s data shows that more than 60 per cent of European funds outperformed the MSCI Europe in 2020, compared with just 36 per cent a year earlier.
The main reason for that shift, however, was due to the sizeable underperformance of the UK equity market – an area avoided by many continental strategies.
Wealth managers’ European picks don’t have that luxury; their own Europe ex-UK sector automatically excludes such positions. That makes their choices’ widespread success last year all the more impressive.
