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DFMs' equity fund turnover under the microscope; Buyers look again at a familiar disappointment

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Turning a corner?

If DFMs’ bond fund turnover increased in 2020, as we discussed last week, then surely the same applied to equity funds? The market mayhem of last March, coupled with the new lease of life that vaccine news gave to parts of the market in November, looked like prime catalysts for change. Our analysis of discretionaries’ equity fund positions, however, suggests otherwise.

Last year the typical DFM either introduced or divested 8.8 equity funds from their model portfolios – exactly the same figure as in the previous year. A quarter of wealth managers in our sample made fewer changes last year than in 2019. By this metric, there is little evidence that the past 12 months proved particularly radical for fund selectors.

In some ways this isn’t too surprising: what worked at the start of 2020 continued to do so once the dust quickly settled on March’s steep drawdowns. And November’s shift in mindsets came too late in the year to have much impact on the annual data. So whereas wealth managers saw the Q1 slump as a prime opportunity to rotate more heavily into credit, in equities they were already positioned well enough.

All the same, we've noted before that 2020 did see increased interest in thematic and specialist funds. And there is no doubt that ESG strategies, in particular, were added to mainstream portfolios like never before. Digging a little deeper into turnover statistics does suggest an acceleration of sorts.

Some 40 per cent of discretionaries did materially increase turnover last year, and the overall averages mentioned above are slightly skewed by a handful of firms who were particularly active at buying and selling in 2019. Exclude those, and an overall uptick in average turnover levels is evident. But even taking this into account, it’s hard to say the tremors of 2020 did much to shake the foundations of DFMs’ investment thinking.

Standing out

One part of the equity market that has been reassessed by some fund buyers of late is Japan – largely as a consequence of its soaring indices. There’s little of the fanfare that surrounded the arrival of Abenomics several years back, but the boost to sentiment is much the same. The Nikkei moved above the 30,000 mark overnight for the first time since 1990.

Last year the Topix posted a 9 per cent return in sterling terms. This isn’t a particularly dramatic rise in the grand scheme of things – many other mainstream indices did better. There were signs of a step change in the autumn, when Japan did briefly stand out as the big equity market winner, but the rally in global shares from November onwards put that move in the shade a little.

As a result, today analysts are saying the Japan story “is not a single-country, domestic-led kind of rally”, rather a reflection of global euphoria. Others are more positive: SocGen acknowledges macro factors such as an indifferent yen and stimulus plans abroad, but says the recent rise for Japanese stocks is largely down to earnings guidance.

Earnings per share growth estimates for 2021 now stand at 46 per cent, and the bank says the recent earnings season shows the recovery is already in train – in sectors ranging from banks to transportation. As other major economies face the prospect of their own recoveries being pushed back, the analysts think there's still room for Japan to stand out.

DFMs, who have started to add to the region again in recent weeks, will likely take a more cautious approach - particularly as they have been burned many times before. But they too may become increasingly tempted as share prices move higher.

Slight return

A week ago, we wrote that Neil Woodford had stayed out of the headlines of late, for “obvious reasons”. Those reasons are arguably all the more apparent now the manager has announced his surprise return with a new business, Woodford Capital Management Partners.

The reaction to Woodford’s nascent comeback has been unsurprisingly negative. Savers’ losses are still fresh in their minds, particularly as some monies are still owed to them. It’s less than 18 months since the liquidation of the manager’s Equity Income fund was first announced, and other repercussions are still making themselves felt, too.

Woodford may still have an axe to grind with Link, the administrator of his ill-fated strategies at Woodford Investment Management, but he is unlikely to win any arguments in the court of public opinion so soon after the event itself. WCM Partners’ services are to be aimed at professional clients, but even they would likely agree the new business would have been better off operating in the background.

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