Managers warm to world of higher bond yields; Price still a dividing line for MPS ranges
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Great expectations
As if to emphasise the issue we discussed yesterday, data from today’s Bank of America fund manager survey shows how the asset allocation pendulum has, once again, swung back towards the US.
As recently as last month, emerging markets were still tipped to be the big outperformer of 2021, favoured by 33 per cent of respondents compared with just 20 per cent tipping the US. Now more than a third believe the S&P 500 will outperform, while the proportion backing EMs has dropped back to 28 per cent.
That’s partly down to investors’ sector preferences: it isn’t just banks and industrials but also tech and healthcare that’ve seen increased interest of late, according to the survey.
All this comes against a backdrop of continued positivity: the proportion of investors overweight all equities rose fractionally to 62 per cent on the month, an all-time high.
But there is a little bit of caution at the margins: average cash levels rose from 3.8 per cent to 4.1 per cent on the month, and the proportion who think small caps will outperform large caps over the next 12 months has fallen from 41 per cent in January to 24 per cent now.
Much still depends on the bond market, of course. In credit, where high-yield is still firmly in favour, attitudes are relaxed. And there are also signs of a relaxation in attitudes to government bond yields: last month most managers said Treasury yields at 2 per cent would be enough to spark a 10 per cent equity market drawdown. This month, that’s crept up to 2.1 per cent.
Will investors continue to adjust their expectations if yields rise further? For a different spin on things, look at buying opportunities. Asked at what point 10-year Treasuries become attractive relative to shares, the average response is now a yield of 2.3 per cent, down from 2.5 per cent last month. That might not be enough to stave off an equity drawdown, but it does suggest yields could be capped more quickly than some expect.
A platform for growth
At the end of March we examined how wealth firms’ MPS ranges had expanded over recent years. New research from Defaqto puts a different spin on those figures.
Across the market as a whole, it counts 222 MPS propositions from 108 different firms. Those 222 propositions include 308 ranges – needless to say, that’s a lot of models, given an average of 6 portfolios per range.
Unsurprisingly, much of the recent growth has come from ESG offerings. And with platforms now the distribution avenue of choice for those launching new models, it’s this part of the market on which ESG growth has focused.
That boils down to 59 on-platform ESG portfolio launches last year, up from 38 in 2019 and just 11 in 2018. We’ve spoken before about the due diligence demands facing DFMs who run these portfolios; it shouldn’t be forgotten that the advisers who access these strategies face similar challenges. As Defaqto puts it, “many ESG portfolios are generalist in nature, so themes can change over time and need regular review”.
But that’s just the tip of the iceberg. The firm notes there are also “some [portfolios] that would contain holdings you would not expect to see”. That’s down to rules permitting a certain percentage in non-ESG holdings. It’s at this point that the pitfalls of using models for clients with particular preferences might become more apparent.
One final point from the study concerns fees. Recent MPS launches have had headline costs below the 0.2 per cent mark. But total costs across the industry as a whole, incorporating underlying funds and transaction charges albeit not platform fees, are still much higher.
Defaqto puts this average charge at 0.9 per cent for an on-platform active model – though that includes a low of 0.14 per cent and a high of some 2.7 per cent. Asset managers have been accused of ‘clustering’ on price in recent years, but thus far there’s less evidence DFMs are doing the same.
Sell outs
A final twist in the tale of Brevan Howard’s ultimatum to the boards of its two investment trusts. Having agreed to revert to a more expensive charging structure, the boards are now looking to merge the two portfolios ahead of giving unhappy shareholders the ability to divest via tender offers.
The proposal, put forward by largest shareholder Investec Wealth, looks a sensible move given, as the BH Macro board says, the risk of “each company potentially continuing in a smaller, more illiquid form”. It’s clear the largest shareholder has a particular interest in avoiding this outcome, too.
But whether or not that move does go ahead, the main point of interest for onlookers remains the extent to which shareholders do depart – and the proportion who remain, happy to stomach a return to 2 and 20 fees. March's vote on the matter suggests the vast majority will be staying put.
