Signs of a revival for unloved European funds; Allocators adjust to a volatile new normal
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Euro millions
European assets are slowing rising back up the agenda. We touched on equities’ potential to emerge from the relative doldrums last month; yesterday Ruffer said it is expecting to see growth “surprises” on the continent in the months ahead, and there are other advocates, too.
Gavekal is similarly optimistic over the continent’s fortunes for the remainder of the year. It points to an improved vaccine rollout and the potential for a full economic reopening as a result.
Signs of manufacturing weakness, driven by supply disruption, represent the one “fly in the ointment”. But it says there’s no evidence yet of shortages leading to material price rises. Conversely, one immediate impact may be more positive – as firms respond by increasing capital spending in a bid to meet demand.
And with a service sector primed to rebound, the result could be steepening yield curves, a strengthening currency and, perhaps, better relative returns for equities.
In practice, there are small signs of that happening already. European indices have outperformed non-UK peers in the month since we first discussed this dynamic, by two or three percentage points, but it will take more than a swallow to make the summer for the asset class. Given their reticence to get involved, professional and retail investors alike might require more compelling returns if they are to up their allocations.
Back and forth
Two thirds of all ETFs have seen net inflows so far in 2021, according to SPDR figures cited by the FT. That’s the highest proportion at this stage of the year since 2014.
Is this a rising tide lifting more boats, or simply bets being spread more thinly? This week it again looks like the latter rather than the former. The tech sell-off has taken hold again, meaning one particular high-profile ETF – Ark Innovation – is back in the headlines for the wrong reasons.
The disappointing US jobs figures of last Friday, which prompted a mini-bounce for growth stocks in the belief that inflation fears might be overegged, has already been consigned to the past.
But this back-and-forth is itself perhaps indicative. Value shares may increasingly look like momentum plays, but that also speaks to their consistency as much as their rapid rise. By contrast, growth/tech shares have become altogether more volatile.
The MSCI World Value Index is several percentage points ahead of its Growth equivalent year to date, but that doesn’t tell the whole story. The latter’s performance chart is notable for its greater number of drawdowns.
Sectors like tech have done better than the prevailing narrative suggests: overall 2021 returns are still healthy. But they have become much more prone to bouts of nervousness like the one seen so far this week. This kind of risk profile is to be expected for a richly-valued part of the market: allocators should start accustoming themselves to this particular ‘new normal’.
Onwards and downwards
Putting its fulcrum fees firmly behind it, Fidelity has today resorted to the altogether more familiar practice of lowering the conventional ongoing charges on its multi-asset Allocator range. OCFs on the five funds have fallen from 0.25 per cent to 0.2 per cent – a move which, notably, makes them cheaper than the 0.22 per cent standard set by Vanguard LifeStrategy.
Of course, passive investing will always come at a discount to active equivalents. Yet moves like this are a reminder of how big the gap remains between these strategies and some DFMs’ model portfolios. Multi-asset funds are still seen by many advisers as an option for “less sophisticated” clients, and price clearly isn’t everything. But cost differentials like these do put the onus to prove their worth firmly on discretionary managers.
