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Inflation-proofers buck the trend as DFMs look to autumn; Moving on from the reflation trade

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Buyers get active

As fund selectors head into the autumn, the question (as ever) is whether their portfolios are primed to perform in the weeks and months ahead. So far this year it’s been relatively plain sailing. But discretionaries haven’t been resting on their laurels, and there are those who have been tinkering away beneath the surface.

The buying and selling activity highlighted by our DFM fund selection database gives some insight into these patterns, but not every decision is straightforward.

In the world of fixed income, there’s been an unsurprising shift towards inflation-linked strategies over the past year. Stimulus plans in the US means those funds buying Tips – like the Lyxor US Tips ETF – have proven popular in the past. Funds tracking global linker performance, like those offered by L&G, are also near the top of the popularity stakes.

Lately there’s been a shift towards active management. Fund selectors are perhaps mindful that the inflation debate is becoming more nuanced. The easy money – tracking a simple rise in inflation expectations – has arguably already been made. Whatever the rationale, funds like M&G UK Inflation Linked offering, or Royal London’s Short-Duration Global Index-Linked fund, are starting to appear in portfolios more regularly.

This, however, is in stark contrast to activity in other asset classes. The buying and selling of active funds has continued as usual in 2021. But alongside that there’s been a marked increase in the use of ETFs, particularly those focusing on particular themes or company attributes - and this can't entirely be explained away by the continued rise of ESG investing.

In an uncertain age, the flexibility offered by these products – which offer a relatively cheap and cheerful way to explore a theme for the first time – has perhaps become more valued by fund buyers.

Threading the needle

Speaking of inflation: where now for the reflation trade? The summer stall has given many pause for thought, the context being a shakier economic backdrop in light of the Delta variant’s rise.

There are other issues to contend with in the US, too. Disappointing US retail sales data briefly gave investors the jitters last month, and Morgan Stanley’s US equity team thinks there might be more to come.

The bank’s analysts think this is a “payback in demand” as stimulus checks fade into the past, and are opting for a more defensive tilt for now.

But gloom isn’t the consensus view, and there are some interesting nuances to be found.

SocGen’s own global equity team thinks there are still “sensible arguments” to be long both value and quality shares at the moment.

The team likes value because it thinks some such stocks stand to benefit from further inflationary pressures. Still, as margin pressure increases, SocGen also suspects investors might start to shun companies with bad balance sheets, which would favour quality companies.

Threading the needle between those two positions is arguably what many DFMs are trying to do with their own barbell equity strategies at the moment.

There is one other factor to consider as autumn approaches: the beginning of the end of central bank support.

As far as the Fed is concerned, Goldman’s UK team think a September hint and a November tapering announcement is still on the cards. Its US rates team doesn’t expect a repeat of the 2013 taper tantrum – but nor does the bank think it will be all plain sailing for bonds or equities this winter. Allocators will be keeping these scenarios in the back of their minds for now.

 

Rising hope

History often feels like it’s repeating itself for those who invest in Japan. So it was last week, with the announcement that prime minister Yoshihide Suga was to resign after just a year in office.

That move recalls the Japan of years gone by, which culminated with six different prime ministers in the six-year period between 2006 and 2012.

But there are newer habits that are now ingrained in investors’ minds, too – so it was little surprise to see many fund managers assert that Suga’s departure would be a boon for equity investment.

Wealth managers will recognise that there have been plenty of false dawns on this front in recent times, and will be watching carefully in the interim.

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