Bond sell-off spells good news for DFMs; ESG fund selections stick with their knitting
Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.
Forwarded this email? Sign up here.
Ahead of the curve
How short-lived will the government bond sell-off prove? That question’s on most allocators minds today after the latest bout of volatility. Ten-year US Treasury yields rose above the 1.6 per cent mark last Friday - but are now back below 1.45 per cent.
Despite that quick turnaround, there is some new information to consider. Last Monday we discussed how the bond sell-off had only really affected the long end of the US Treasury curve. That emphatically wasn’t the case later last week: five-year bond yields jumped notably as investor jitters rose markedly on Thursday and Friday. Some say that technical factors were to blame here – an argument supported by the subsequent mini-rally.
Other arguments made prior to that leap are still intact: as it stands, this was a sell-off that didn’t unduly harm the likes of bank stocks. According to Bank of America’s Michael Hartnett, that implies equity investors are still happy enough with proceedings, rather than worrying about overall financial conditions.
And while growth stocks did get hit last week, most analysts agree that the risks to equities aren’t yet too serious. Both Goldman and Credit Suisse analysts predict equity investors should only start worrying once ten-year Treasury yields rise above the 2 per cent mark.
Specifying precise yield levels in this way may strike some allocators as a fool’s game. But even if the sell-off does restart, wealth managers can take some solace.
A yield spike is an outcome about which they (like others) have warned for many years. Each move of this kind will prompt more doubts among those holding simple equity/bond balanced portfolios. It will also cause concern for some of their biggest rivals in the marketplace.
In short, government bond woes might well prove good for DFMs’ business. That’s a crude calculation, but it could yet prove an accurate one.
Round peg, square hole
As ESG interest continues to climb, index-tracking strategies of the same ilk are expected to start gaining more of a foothold, too.
That’s not currently the case when it comes to DFMs’ own fund choices: our ESG fund selection database shows the only passive options held by sustainable portfolios are conventional bond index trackers – Vanguard’s UK Government Bond Index tracker, for instance. But it seems likely that'll change as more options make their way to market.
Not all are convinced. Hawksmoor private client CIO Jim Wood-Smith wrote last week that passive ESG funds “should only be bought for clients who do not believe in ESG”.
His argument, more precisely, is that such strategies might work for those who think ESG credentials will drive performance, but not for those who believe in the concepts of sustainable or ethical investing. The thinking is that ESG scores are easy to game, rendering most passive indices meaningless.
Providers do recognise this thinking, which is why larger players are increasingly opting to track their own indices rather than those created by third parties. That at least gives a measure of control – even if it does shift products into smart beta territory, and so close the cost gap between active and passive.
All the same, there is good reason why active managers see ESG as the saviour of their business model. Due diligence is the name of the game nowadays. And from this vantage point, it’s hard to see passives taking as large a chunk out of the sustainable investing marketplace as they have done with regular strategies.
Boom time
Is the UK in the throes of an M&A boom? The logic is compelling: with a Brexit deal secured, valuations at multi-year lows, and the prospect of a post-Covid economic bounce now on the cards, the stars may be aligning for some buyers.
The reality might prove slightly different. Deals are being done, but many shareholders are not unreasonably urging caution – pointing out that premiums being paid should reflect the long-term value of the acquirees, rather than share prices that reflect an unprecedented past 12 months.
Of course, investors are always likely to say that bids undervalue their holdings. Whether or not their reasoning holds more weight with peers this time around – or whether they are powerless to stop companies being taken out left, right, and centre – remains to be seen.
