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Away from equities
The equity market rotation and reflation trade have captured investors’ attention this year – and other than the brief excitement at government bonds’ spring sell-off, fixed income and alternatives have struggled to get a look in.
But as we mentioned yesterday, most wealth portfolios’ equity allocations remain pretty tightly confined. So for all the increased interest in value, UK or European equity funds over recent months, it’s no surprise that our asset allocation database shows only minimal changes to overall equity weightings this year.
‘Tina’ is a part of that – there are relatively few discretionaries who opt to underweight equities as an asset class. One consequence is there’s much less agreement on how to balance out these positions. And when it comes to diversifiers, there have been some notable shifts in 2021.
The average balanced portfolio's fixed income allocation, for example, has dropped from 25.5 per cent to less than 23 per cent this year.
The source of that fall isn’t as obvious as you might think: government bond allocations have dipped a little, but the biggest drop has come from wealth firms dialling back their corporate bond exposures. The typical investment grade weighting has fallen from 10 per cent to 7.7 per cent in the first eight months of 2021.
This money isn’t being put into alternatives instead. The likes of property and absolute return funds have also seen allocations reduced this year - although some of these changes amount to little more than rounding errors.
So where has the money gone? A small amount has been put into equities, but the bulk has gone to cash. In some cases, this may be a minor flight to safety. In others, it’s because question marks that continue to hover over both bonds and alternatives when it comes to their role as diversifiers.
All that said, it’s undeniable that the overall appetite for equities has never been higher. Globally, inflows this year are on course this year to outstrip flows for the past 20 years combined. In the UK, retail flows might break records, too.
Investment Association statistics show that equity funds took in a net £8.2bn in the first half of the year. That puts them comfortably on track to supersede the £12.8bn achieved in 2014.
Overall retail fund inflows, which stand at £24bn for the first six months of the year, also have a good chance of beating the £48bn record set in 2017.
The operative word here is retail as much as it is equities. Or, to be more precise, ‘non-institutional’. Because while direct-to-consumer and advised flows race away, institutions’ appetite for open-ended fund assets remains pretty muted.
That’s been the case since at least 2018: institutional products saw redemptions in 2018 and 2019, and last year managed a meagre net inflow of £3bn compared with retail products’ £30bn. But this year could yet prove worse still: as retail funds are poised to hit new heights, institutional flows equate to a £5bn outflow thus far.
Given the timeframe involved, this is probably a structural rather than cyclical shift. It may have something to do with institutional buyers' increased interest in private assets. Alternatively, it might just be a sign that animal spirits aren’t enveloping all parts of the market.
The other side of the coin
Lurking in last month’s fund flow data is a withdrawal that highlights the fine line fund firms are having to walk at the moment. Morningstar estimates that a record £450m was withdrawn from Ninety One Global Multi-Asset Sustainable Growth in August, following its repurposing as a sustainable offering.
There’s no suggestion of greenwashing here: the former Diversified Growth strategy, which still has almost £800m in assets, had struggled to perform and was arguably in need of some kind of refresh.
But the surge in outflows emphasises that revamping strategies isn’t without its own risks. ESG may be asset managers’ great hope for the future, but some clients will tolerate underperformance more readily than they will a change of investment style.