Fund buyers double down on favourite strategies; Real-asset income the saving grace for DFMs
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Piling in
From a market perspective, the opening weeks of 2021 have been characterised by a kind of investor euphoria. When it comes to fund sales, however, the dominant sentiment isn’t wild excess – it’s a renewed insistence that existing preferences still make sense.
A look at the best and worst-selling strategies of the year so far reveals some pretty familiar trends. And while fund selectors aren’t necessarily getting carried away, some of those tendencies are looking more pronounced than ever.
Take Baillie Gifford, which has been the go-to group for buyers for some time now. We reported earlier this month that buyers of the firm’s investment trusts show little sign of abandoning ship. And for holders of open-ended vehicles, things look even more positive.
Six of the top 20 most popular funds in January were run by the Edinburgh-based fund house, according to Morningstar estimates – ranging from Positive Change to Global Discovery and even its China strategy.
Meanwhile other popular picks of 2020 continued to prosper. Allianz Strategic Bond reaped the rewards of a cautious stance last year – and it took in a record £262m in January, per the Morningstar data. That’s hardly a sign of buyers throwing caution to the wind, but nor is it an indication they’re much inclined to change tack.
Further confirmation comes from the continued travails of UK equities. The FTSE may have jumped at the start of 2021, but buyers remain thoroughly uninterested. While there was increased interest in UK small caps, the number of all-cap UK funds that took in money in January can be counted on the fingers of both hands. And for the first time in many moons, the ‘Big Four’ funds all saw net outflows over the period. Whether it’s long for this world or not, it’s a strange bull market that so thoroughly discounts wealth managers’ domestic market.
Open for business
DFMs’ long quest for good diversifiers has encompassed many different types of real asset exposure over the years, particularly when it comes to real estate and infrastructure assets.
Open-ended property funds’ repeated struggles mean they have long since been eliminated from most portfolios. That leaves either investment trusts – for those that can easily access such strategies in their models – or listed property or infrastructure equities.
Property securities and their ilk may not provide the same level of diversification as physical assets, but they’re far from redundant. Almost 60 per cent of DFM model portfolio ranges contain some exposure to property or infrastructure equity funds, according to our database.
And that’s remained the case despite the struggles endured by many of these strategies in 2020. Global listed infrastructure and property funds were hit just as hard as mainstream indices at the start of last year, and have lagged in the recovery.
The main saving grace is, inevitably, their yields: most still throw off around 3 per cent a year – not to be sniffed at in the current environment. Some infrastructure income strategies, like that run by Legg Mason, still have historic yields in excess of 5 per cent. If capital growth has disappointed slightly, those yields now stand out even more at a time when payouts have plunged elsewhere.
As a result, interest in these funds among discretionaries has increased further over the past 12 months. Infrastructure, in particular, is one part of the market where holders will feel pretty comfortable about prospects for the months ahead.
Future shock
On Monday we discussed the view that Japanese earnings season is propelling the country’s surging markets just as much as macroeconomic factors are. And now more than ever, it’s the future that matters – even in everyone’s favourite equity market, the US.
Analysts at Goldman note that S&P 500 profits, as reported in the Q4 earnings season, have already exceeded pre-pandemic levels. The difference is that investors now consider earnings to be an even more backwards-looking metric than usual.
Unsurprisingly, given hopes for the year ahead, it’s guidance that really interests the market. That’s where Japan has been excelling, and that’s why big earnings beats in the US haven’t really had much impact. Despite the strength of Q4, companies’ subsequent share price moves amounted to “the weakest post-report performance on record”, according to Goldman. Those that have raised guidance have been richly rewarded, and will likely continue to be feted as 2021 progresses.
