Asset AllocatorMay 26 2021

Fund selectors increase focus on biggest calls; A dividend problem for sustainable funds

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Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.

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Core strategy

As wealth portfolios continue to eke out gains, the second quarter of the year has been plain enough sailing for DFMs thus far. But as always, there are interesting things going on beneath the surface.

When it comes to asset allocation, our latest analysis of trends in the model portfolio world shows wealth managers were again happy enough to let existing holdings capitalise on April's returns.

All the same, a sizeable minority made tweaks to their positioning – and those changes tended to fall into one of two categories.

The first, much smaller, grouping, saw a handful of DFMs cut back on their high-yield debt positions. Dedicated high-yield holdings remain few and far between, and the asset class has again shone this year. But that has prompted profit-taking in some quarters.

The second set of changes speaks to a wider issue in the industry regarding equity allocations. We’ve previously discussed the recent uncertainty over both emerging market and Japanese fund holdings, as well as the slow shift to a more positive stance on European equities. But the truth is that each of these allocations remains a relatively small part of portfolios.

At times of uncertainty, that can often mean fund buyers focus their energies on their larger regional allocations. Decisions to be made over UK and US positions are arguably no easier, but they are more important, given the relative weights accorded to those regions. And last month, in a reversal of recent trends, several DFMs turned slightly more positive on the US once more, adding to US exposures at the expense of other regions.

The uncertainty over those geographic holdings has also continued to translate into a greater interest in thematic or global equity funds. Making a call on a particular investment sector, rather than region – or simply leaving the latter decisions to a global equity manager – is seen as the most sensible option at the moment.

Two-track recovery

The latest Janus Henderson Global Dividend Index underlines the 2021 narrative on corporate payouts: the worst is largely behind us, and signs of a revival are underway. The crucial question remains how quickly that return to growth will take hold. While there are pockets of the market where a rebound is obvious, most forecasts emphasise it will take years to regain the heights reached pre-pandemic.

That’s not such a big issue for those focused on dividend growth. And when looking at how things might play out in future, it’s worth noting that Janus Henderson says the shape of last year’s cuts, on a global scale, was “consistent with a conventional, if severe, recession”. The nature of the coronavirus crisis may have been like no other, but this suggests these aren’t unprecedented times for dividend investors.

The problem might be that the recovery takes place in a very different asset management universe. Unsurprisingly, it’s commodity companies that are leading the way in 2021 so far, soaring prices having led to major growth in the likes of mining payouts. But miners and oil majors are, of course, typically persona non grata for the sustainable funds to which providers and fund buyers alike increasingly turn.

In the UK, yields on the relatively small pool of sustainable equity income funds remain in line with the wider market. But these are historic yields, and will not yet have factored in that Q1 materials bounce. If other sectors see slower recoveries than the commodities complex, sustainable income strategies might have to accept a structurally lower level of payouts for some time yet.

Sustained attention

The question of exactly how sustainable ESG strategies actually are isn’t going to go away. Reuters last week reported the FCA’s asset management head was critical of how firms articulate their ESG credentials, describing efforts as “not good enough”.

The UK’s own version of SFDR, while yet to be formalised by policymakers, may help on this front. But there are other areas for asset managers to watch, too: the FCA is also due to give an update on fund firms’ fee transparency in the weeks ahead. While much of its recent work has been occupied first with Brexit and then Covid-19, it may be that fund groups find themselves back in the watchdog’s crosshairs before too long.