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Defensives the big loser as allocators look to H2; Manager moves spell trouble for active funds

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Flash in the pan?

If the muted reaction to last week’s US inflation data wasn’t confirmation enough, figures today indicate the vast majority of fund managers think price growth will indeed be transitory.

The monthly fund manager survey from Bank of America finds some 72 per cent of respondents do indeed think inflation is temporary, with just 23 per cent saying it is permanent.

Of course, what constitutes transitory or permanent inflation is very much in the eye of the beholder. There are signs from asset prices that the current round of price growth has already come to an end. But as our latest podcast discusses, the risk of assuming the inflation risk is over is one to watch in the weeks ahead.

For now, while some resources prices may have peaked, the commodity complex has taken on an unenviable position as the world’s most crowded trade. It’s the first time in two years that survey respondents have voted for something other than US Treasuries, tech or Bitcoin in this slot.

Bonds themselves remain on the backburner: allocations are at a three-year low, with the proportion saying they’re overweight the asset class standing at -69 per cent.

But equity positions remain a little more nuanced than that may suggest: the cyclical rotation has continued in recent weeks, according to BofA, but at the same time it was – yes – tech that saw the biggest positive switch over that period.

As per DFMs’ own preferences at the moment, it’s a barbell strategy of growth and value that’s viewed as most likely to perform in the months ahead. That leaves one principle loser: defensive sectors like utilities and staples have seen fund manager interest decline further over the past month; interest in the former is at its lowest level for more than four years.

Out the door

Caution over defensives – or more specifically over the equity income funds that hold them – is also seemingly evident in the latest fund flow estimates from Morningstar. Money left the sector in May for the 11th time in 12 months.

But as is often the case, last month was more a case of individual culprits rather than a sector-wide flight. Morningstar estimates the biggest UK income outflows on the month came from Royal London UK Equity Income and Troy Trojan Income, which shed a combined £330m. That accounted for the bulk of the sector’s £393m outflows, and was likely due to the imminent departures of managers Martin Cholwill and Francis Brooke.

Other big strugglers have also seen recent manager moves: Invesco Global Targeted Returns saw an estimated outflow of £615m and has now suffered £2.8bn worth of net redemptions in 2021 alone, according to the data provider. David Millar, one of the original architects of the fund, has stepped back in recent weeks – though it’s clear that performance rather than reduced personnel is the main issue for holders at the moment.

While these are all idiosyncratic cases, the manager merry-go-round is a regular feature of active management fund selection. That can mean the fund flow picture often looks worse than it really is. The £750m pulled from active funds in May was the highest figure seen since September 2020 – but as the above shows, all it takes is one or two high-profile departures to skew the dataset. 

Slow road to regulation

The UK government last week took its first steps towards creating a domestic equivalent of Europe’s sustainable finance disclosure regulation and its accompanying requirements - via the announcement of a working group tasked with tackling greenwashing.

The group will oversee the creation of a ‘green taxonomy’ – a framework for defining what constitutes a sustainable investment. The EU’s own taxonomy regulation arrives at the start of 2022, but SFDR itself is of course already in force.

When the UK comes to designing and implementing its own version of the latter, it may find it difficult to deviate too much. And while the lesson of Mifid II suggests that UK regulation isn’t always lighter touch than its European equivalent, that may ultimately prove the case for SFDR. The first clue will come later this year when the FCA publishes its own principles for sustainable funds.

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