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Pinpointing the true crowded trades; Equity factors' tug-of-war starts to balance out

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Crowded out

The accepted definition of a ‘crowded trade’ tends to be synonymous with ‘most popular trade’: it’s partly for this reason that being long tech is consistently labelled the most obvious example of mainstream investment crowding, per the monthly Bank of America fund manager survey.

But while this response tells us something about market direction, it doesn’t say anything about liquidity. And the world’s largest tech stocks are at least big enough to accommodate almost any number of holders without undue impact on this front.

Other popular sectors are much smaller: clean energy, for one. Some argue it's here that true “crowding” is most evident. MSCI says the sector is now almost as crowded as tech stocks were at their dotcom peak, and vulnerable to a sell-off much more sizeable than the one seen in recent weeks.

The liquidity impact has already become more visible: the S&P Global Clean Energy index, tracked by the likes of the iShares Global Clean Energy ETF (which took in £7bn in US and European net flows last year), last month dramatically expanded its number of holdings in a bid to stave off problems. Index providers have increasingly found themselves in the eye of this particular storm.

For wealth managers, the impact isn’t as severe. Passive clean energy and indeed ESG fund picks remain very much a minority pursuit compared with their active equivalents, according to our fund selection database.

But here too there are warning signs. Plug Power, the US fuel cell company that was the iShares ETF’s largest holding until the rejig, doesn’t rank among the largest stocks of any ESG strategy available on these shores.

Yet the new top stock – Vestas Wind Systems, now more than 8 per cent of the portfolio – is also among the recent top holdings of popular ESG strategies like Ninety One Global Environment, as well as regular European equity funds like Invesco European Equity. Active managers – and those who hold them – should be on their guard against spillover risks from passive concentration issues.

A hybrid approach

As the recent decline for those clean energy indices suggests, the sense of equity market euphoria has been dialled down again in recent weeks. But the way in which that small retreat has played out suggests a subtly different dynamic to that seen over the past year.

May’s fund manager survey from Bank of America, released last week, shows a modest increase in average cash weightings, which are now at their highest level since November’s vaccine bounce. All the same, investors are no longer simply involved in a tug-of-war between growth and value shares.

This time, more cautious views on global growth aren’t translating into a retreat back to tech: allocations to technology shares fell nine percentage points on the month.

Instead, more traditional havens found favour for the first time in a while. Allocations to staples rose by some 21 percentage points on the month (to a net four percent underweight), and both “high quality” and high dividend yield stocks also showed signs of renewed positivity. 

The proportion of respondents who think high-quality earnings will outperform low-quality earnings has risen from a net 17 per cent to a net 41 per cent. And there was an equivalent drop in the share of respondents who think high-yield debt will outperform investment grade.

These shifts are far from uniform – in Europe, where optimism is continuing to increase, sentiment seems much more closely aligned with the value versus growth debate.

To many investors, all this might appear suitably sensible. There's the sense that the genie isn’t going back into the bottle for tech, but while a repeat of the runaway success of recent years doesn't seem to be on the cards, nor does dotcom 2.0. A middle ground between those two poles will be gladly welcomed by allocators.

Shutting up shop

The permanent closure of the Aviva Investors UK Property fund brings together two themes that have been a feature of the UK fund landscape in recent years, and the past year in particular: value for money, and the general practicality of open-ended physical property funds.

The latter is clearly the more pressing matter in this case: while Aviva conducted a strategic review of the fund as part of its latest value assessment, the wood to those trees is the suspensions seen across the property sector last year.

Having suspended in March 2020, this particular fund fulfilled a prophecy that some property portfolios would “never reopen” following the events of last spring. A third theme – that of the FCA clamping down on illiquid assets in daily-dealing portfolios – could yet spell long-term extinction for many peers, too.

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