Asset AllocatorNov 26 2021

UK equity upheaval challenges wealth portfolios; Allocators weigh up a return to 2020

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Reader note: Asset Allocator will be off next week, and will then operate a reduced service in early December prior to the annual Christmas break.

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Domestic doubts

While investment styles have shifted in and out of favour in 2021, it's nonetheless been a strong year for wealth portfolio performance. But as we noted earlier this week, there are signs that portfolio composition problems are starting to make things trickier.

UK equity funds are a case in point. Value funds’ upturn in fortunes have led some wealth portfolios to adopt a barbell approach to their underlying fund picks. All the same, many are still reliant on the ‘Big Four’ funds that we’ve discussed on several occasions in recent years.

Their fortunes have been decidedly mixed in 2021. Liontrust Special Situations has retained its knack for outperforming in most market conditions, but the remaining trio haven’t been so successful. Man GLG Undervalued Assets has been unable to maintain the outperformance it enjoyed amid the vaccine rally last year; Ninety One UK Alpha has also struggled; and Lindsell Train UK Equity’s relative travails have been the cause of much angst for manager Nick Train.

One other thing to note on this front is the way the UK equity market performance has arguably diverged from peers in recent weeks. Whereas global growth indices comfortably outperformed their value equivalents in October, the reverse was true for domestic shares.

That’s put additional pressure on those who still rely on quality growth picks for their UK equity exposure. Conversely, it’s given an additional fillip to the likes of JOHCM UK Dynamic, one of the big success stories of the year and an increasingly prominent player in DFM portfolios. As 2022 draws close, discretionaries’ top UK growth picks may be set for a shake-up.

Back to 2020?

None of this may ultimately count for much if today’s repricing activity is anything to go by.  

The emergence of a new coronavirus variant, and accompanying travel restrictions in some quarters, mean markets have a distinctly 2020 feel to them. Travel-related stocks have been hit hard, and work-from-home plays are on the up again – as are vaccine producers in US pre-market trading.

Similarly, expectations of tighter monetary policy have been dialled down. A December rate hike in the UK, seen as a done deal 24 hours ago, may already be off the agenda.

There’s no guarantee all these trends will last. While some European nations have shown themselves to be willing to reimpose major restrictions this month, at this stage it’s difficult to see the US and UK following suit in any significant manner.

If the variant is as bad as some fear, it’s true that the likes of travel stocks are unlikely to recover quickly. But other ‘reflation’ trades – specifically inflation itself - may prove harder to dislodge.

Capital Economics note that a “virus-related surge in goods spending, or port closures, would exacerbate existing supply strains”, and could also deepen labour shortages. That doesn’t point to a cessation in price growth any time soon.

So allocators may find themselves in a scenario where inflationary pressures increase further, yet safe-haven flows mean government bond yields fail to rise materially. That looks more like the dynamic of recent weeks rather than one reminiscent of 2020 market trends.