Allocators signal the start of a new investment era; Passive ESG in the headlights
Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.
Forwarded this email? Sign up here.
Brave new world
‘It’s over’, Bank of America says bluntly this morning. The bank's referring not to the pandemic itself, but investors’ view of it as the largest ‘tail risk’ for their portfolios.
That risk been knocked off the top spot in the latest BofA fund manager survey for the first time in a year, with both inflation and a bond taper tantrum now perceived as bigger threats.
On rates themselves, responses to the March survey reflect the balancing act that investors and policymakers are attempting to walk. They show the biggest jump in short-term rate expectations in two years, but despite that, the first Fed hike still isn’t expected until February 2023. Can both those positions co-exist in the medium-term? That’s arguably the most pertinent question for portfolios at the moment.
The survey authors, like other analysts before them, attempt to quantify precisely when 10-year Treasury yields prompt a severe drawdown in equity markets. The answer is surprisingly similar to those already provided: 45 per cent of respondents think 2 per cent is the “level of reckoning” that would prompt a 10 per cent drop in shares. No other yield level received more than 20 per cent of the votes.
For now, the story is very much one of rotation rather than retreat. A record 52 per cent of investors think value will outperform growth over the next year; investor optimism on commodities is at its highest ever level; tech overweights are at their lowest since 2009.
There are even signs of light for that most unloved part of the equity universe: UK shares. The net underweight to the asset class now stands at a mere 1 per cent. The UK remains the least popular region in the survey, but improving sentiment on this front really would mark the start of a new phase for markets.
Toxic environment
Given it combines the two biggest trends in collectives investment, it’s no surprise that passive ESG is continuing to attract headlines. As we reported earlier this month, some think this particular combination may prove too much (or rather too little) of a good thing. More generally, criticism of the way that passive indices are constructed isn’t hard to find.
A study published by Impact Cubed earlier this month appears to back up those claims. It compared 13 European-domiciled passive ESG equity offerings with the MSCI World index, and from the perspective of impact investing, deemed three to have a more negative effect than the conventional index.
The firm suggests that may be because such funds focus on a particular part of the sustainable investing picture, such as low-carbon solutions, “without managing other ESG factors”.
That's understandable enough, particularly as many investors tend to prioritise environmental factors anyway. But the research also found that two other passive ESG strategies had a higher carbon footprint than the MSCI World index itself. More evidence that fund selectors have to be particularly careful when it comes to sustainable investing.
Passive ESG interest continues to accelerate rapidly nonetheless. A SPDR US Corporate Bond ESG ETF, launched in Europe last October, took in some €4.6bn in net flows last month, according to Morningstar data cited by Ignites Europe and the FT. Greater due diligence demands are either no impediment to flows, or they’re not really being considered too much after all.
Property progress
There's perhaps light at the end of the tunnel for UK equities, and there’s also some belated signs of life for M&G’s Property Portfolio. Suspended way back in December 2019, the fund has remained shut since then, but the company now says it expects a reopening in the second quarter of this year.
That announcement leaves just Aegon and Aviva with suspended funds that have yet to announce their own reopening intentions – Janus Henderson’s own vehicle having ended its suspension at the end of February.
This is mostly academic for wealth managers: when it comes to professional fund buyer interest, open-ended property funds are now yesterday’s news. But for those who still hold suspended funds - and have had to carve them out of their clients’ main portfolios in the meantime – the news will nonetheless be welcome.