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Sustainable allocators face new test of their mettle; Selectors reassess equity income ruptures

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Built to last?

Tech stocks’ latest minor stumble looks set to continue for another day. Yet wealth managers’ attention might just be focused on the relative weakness of a different part of the equity market.

There have been signs of weakness for technology prior to this: big names like Amazon and Facebook have been treading water for several months now. Microsoft, which we flagged a few weeks ago, has at least prospered more recently. But the latest falls are happening across the board and for now confined to tech alone: the Nasdaq dropped 2.5 per cent yesterday while other US stocks were up.

Other equities are also experiencing a more subtle pause for breath. A sizeable chunk of ESG funds have been relative underperformers for several weeks now.

As with the Faangs, a dip of this kind was always likely at some stage: sustainable portfolios were unlikely to outstrip conventional equivalents on an indefinite basis. But it’s worth considering the drivers of this shift.

Technology shares aren't to blame in this case: the sector’s gains earlier in the year mean those sustainable strategies that do focus on tech, like BG Positive Change, are still comfortably ahead of their benchmarks in the short-term.

Nor, however, is the ESG dip simply a result of the rally being enjoyed by cyclical sectors like energy. Some sustainable bond funds have also begun to struggle in relative terms, despite their peers typically shying away from the energy space.

For now, then, this may simply be another case of favourite securities pausing for breath. As with many such shifts, this one could easily burn out pretty quickly.

If not, those investors who have made a structural shift to ESG will be prepared to ride out periods of underperformance. Equally, this would mark the first test of its kind since the sustainable boom began – and would be worth watching for that reason.

Redistribution

Earlier this month we looked at the long road to recovery for UK equity income strategies. There’s been slightly better news in the past few days, courtesy of Barclays, Natwest and now HSBC restarting dividend payouts.

Yet these too have arguably served to confirm the struggles ahead: HSBC’s efforts on this front have disappointed analysts, and all three remain restrained by Bank of England rules on payouts.

Figures from Janus Henderson’s Global Dividend Index, released this week, show how badly the UK market was hit by the pandemic. Regulatory restraints helped ensure both the UK and Europe underperformed by global standards, but even then the 41 per cent drop in UK headline dividend growth last year was well ahead of the 32 per cent fall on the continent.

The global average, for context, was a 12 per cent drop. In North America, growth was actually in the black, a 2.6 per cent increase aided by Canadian strength and US corporates' focus on cutting buybacks rather than dividends.

Of course, that’s also because North American payouts start from a much lower base. Conversely, as Janus Henderson notes, “to a large extent the UK picture reflects historic overdistribution by many companies”. In 2019, four of the ten biggest dividend payers around the world were listed in the UK. None maintained that position last year.

UK and Europe aside, there were plenty of signs of relative resilience in 2020: not just North America but also Asia Pacific and Japan. The question for fund selectors is whether they should back this stability more forcefully than they have in the past – or whether UK strategies, tasked with a multi-year rebuilding process, are now a pretty safe bet themselves.

Finite strength

The music may still be playing, but the dancing has stopped for some fund managers. Infinity Q, a US asset manager, has announced it's placing its founder and CIO on leave and closing a $1.8bn fund in response to an SEC probe over derivative valuations.

The strategy’s altogether unknown on these shores, so needless to say it isn’t one that features in even the most adventurous UK DFM’s portfolios. But this isn’t the first time that awkward questions over asset valuation processes have made themselves heard of late. It’s another reminder that there are still plenty of unusual goings on in the fund management space – and it won’t necessarily take a market slump to exposure that activity.

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