Fund selectors take cautious approach to value surge; Breaking bond habits proves hard to do
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Value strategies are seemingly on the march: the MSCI global value index hit a record high last Thursday as both growth expectations and borrowing costs rise, and that's prompted plenty of reflection from market commentators.
Better times for such strategies have, of course, been evident since last November. But it’s the last month in particular that’s seen a big shift in US fund flows: after minimal interest throughout last year, US value strategies took in $1.3bn in January and some $6.3bn in February, according to Morningstar Direct data cited by the FT.
That’s not the whole story, however. Earlier this month we noted that some analysts thought the value rally wasn’t performing “quite as strongly as you might expect”, in part because of the size of the gains made in late 2020. Instead, it had proven more rewarding to simply turn to cyclical or small-cap plays.
And while US fund buyers are piling in to value, selectors on these shores are spreading their bets more widely.
True enough, figures from Morningstar for UK-domiciled funds show Schroder Recovery recorded its best month for flows in more than a decade in February. But there's still little evidence of a widespread rush to value. What is more apparent in the increased interest in small-cap strategies, with the likes of Artemis US Smaller Companies and Amati UK Smaller Companies among the biggest winners.
Aside from that, other equity preferences remain more or less intact: outflows for equity income strategies, but continued inflows for current sustainable and ESG favourites. It may be that the US’s larger cohort of retail investors is driving the greater interest in value strategies. Either way, the shift seen on these shores looks more gradual for the moment.
Fixed fixed income
It’s not just investment styles: last week we discussed how equity diversification is becoming more apparent on a regional basis, too. Nowadays wealth portfolios are much more likely to have exposure to all the main equity regions.
For bonds, however, the picture is largely the same as it was back then. Collectively, portfolios are now even more likely to shun EMD or short duration strategies. The latter, in particular, will come as no surprise at this point. But these are relatively small preference shifts – as are all those on display in the chart below.
The biggest change on show relates to corporate bond strategies. The opportunities of 2020 mean that just a quarter of moderate portfolios now shun dedicated corporate bond fund exposure. Strategic bond strategies, too, have seen a slight uptick in usage.
But there is one area where the absence of change is notable in itself. Back at the start of 2019, three in five DFMs had no exposure to index-linked bonds in their moderate portfolios. The figure was exactly the same at the start of 2021 - despite the renewed interest in a possible rise in inflation.
Linkers aren’t a perfect way to express that view, but it seems probable that this part of the fixed income world will finally start to see more interest from wealth portfolios in the months ahead.
A strong hand
Early signs of a resolution to Brevan Howard’s forthright demands to the board (and the holders) of the BH Macro and BH Global trusts. The board is to put to shareholders the hedge fund’s proposal to return to a 2 and 20 fee structure. Alongside that, a tender offer for up to 40 per cent of share capital – at a 2 per cent discount to NAV – will be introduced for those who can’t stomach the change.
No sign here, then, of the compromise arrangement floated by both Numis and Liberum back in January. But nor is there a move to wind-up the trust instead. As Numis says of the latest developments, “the success of [the] ultimatum shows the considerable strength that management groups can have”. In this case, the argument of whether it’s worth paying a premium for diversification attributes may prove pretty one-sided.