Asset AllocatorMay 5 2021

Fund buyers' value rotation starts to pick up pace; Correlations shift as recovery takes hold

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Highly valued?

It’s now almost six months since the news of the Pfizer/BioTech vaccine efficacy first prompted allocators to reconsider their investment priorities. The subsequent rally in value and cyclical shares has continued well into 2021, at the expense of the technology sector in particular.

While recent weeks have seen those shifts pause for breath, it’s worth considering how the changes have played out from fund selectors’ perspective – particularly when it comes to UK equities.

The pool of available options is broad enough: per Morningstar data, of the 200 active UK equity funds available to discretionary managers, around a quarter have a distinct value slant. That’s the same as the proportion with a clear growth bias, according to the data provider.

But how popular are those selections proving? We’ve discussed many times before how four funds have tended to dominate UK equity fund selection. And these aren't entirely growth-focused: one, Man GLG Undervalued Assets, is categorised as a value strategy by Morningstar.

Of course, many such definitions are up for debate. There have been questions in the past over just how value-oriented the Man portfolio is. Yet its performance over the past six months certainly points to it being in tune with the latest rotation.

Another value-tilted strategy that retained interest from wealth managers during the style’s time in the wilderness is JOHCM UK Dynamic. Other value go-tos for professional buyers include the likes of Schroder Recovery and Polar Capital UK Value Opportunities.

All the same, our fund selection database provides limited evidence of new positions in these strategies over the past six months. The odd switch is emerging, but nothing too dramatic just yet.

In terms of overall fund flows, the picture is more positive.

JOHCM’s earlier travails saw an estimated £330m leave UK Dynamic between November and March, according to Morningstar. But a £100m inflow in the latter month suggests interest has returned. Over the same period, Schroder Recovery took in an estimated £165m, Artemis Select £140m, and Man GLG’s strategy £75m.

Figures for Polar are harder to discern, but look to be in the region of £250m or more. Interest may well accelerate further now expectations of economic recovery are bedded in – even if value doesn’t flourish in the future quite as much as it’s done since November.

Another recovery play

The shifting sands of the global recovery also mean a change in intra-asset class correlations. Commodity prices are roaring higher, and while some are sceptical over how long those trends might last, for now they’re having consequences elsewhere.

The most obvious is in resource-friendly emerging markets. The caveat is that surging price growth worldwide might ultimately lead to a withdrawal of stimulus measures, a move that would hurt those same EMs. But most policymakers, not least those in the US, are clear that we’re not there yet.

That leaves a window of opportunity for emerging countries, and emerging currencies. Bloomberg reports that correlations between its commodities benchmark and the MSCI EM Currency index are strengthening – at the same time that the link between global equity indices and commodity prices is starting to decline.

It's up for debate whether roaring inflation should such an outcome ever materialise at a society-wide level, would derail global equities ahead of EM assets. Nonetheless, with allocators searching for different ways to play the ongoing recovery, some of the more nimble players will be looking closely at the likes of emerging market debt. For the rest, that same window of opportunity might prove too narrow – and too liable to slam shut – to suit their portfolios.

Same as it ever was

The talk of changing practices and preferences can get ahead of itself, of course. First-quarter figures from the Pridham Report, detailing the best-selling fund houses of the period, emphasise how much things have stayed the same.

The three names at the top of the net sales chart - Baillie Gifford, Allianz Global Investors, and Liontrust – could easily have filled those slots in any recent pre-vaccine quarter. All feature in the top ten for 2019, for instance.

If anything, the wave of money coming into the fund management industry in the first three months of 2021 has only strengthened their hands. On the face of it, the firms’ respective strengths in growth investing, bonds and ESG all look susceptible to tougher months ahead. But there’s no sign yet of it damaging their fund flows.