Happy New Year to our subscribers! Asset Allocator will be coming out twice a week - on Tuesdays and Thursdays - for the foreseeable future.
Been forwarded this email? Sign up here.
For our fund selection podcast, tune in on Acast or Spotify, or find us on Apple Podcasts.
Staying the course
The “new year, new you” mantra has not fed through into the market outlook. That’s one take from our latest tally of fund firm asset allocation views, which has much in common with the version from Q4 2021. Asset managers remain positive enough on stocks, albeit with some major dividing lines.
The firms remain overwhelmingly positive on the US and Japan – if for markedly different reasons. Many are confident that the strength of US earnings can justify high valuations - an argument that may reassure some in light of the latest tech sell-off (see article below). DFMs are also expecting better things for Japan after an uninspiring 2021.
Elsewhere it’s a case of marginal shifts. Sentiment has softened slightly on both the UK and Europe, while fund firms have warmed a little to Asia and emerging markets – with plenty of caveats about the outlook for Chinese shares.
With inflation and monetary policy dominating the agenda, it’s unsurprising to see further gloom on fixed income. Already an unpopular sector in late 2021, government bonds are now facing even higher levels of negative sentiment. Investment grade has also drifted even further out of favour. Not a single fund firm in our sample now views this asset class positively.
Elsewhere positivity on high yield has fallen back slightly if most firms remain bullish or neutral. With allocators fearing last year’s optimal conditions are unlikely to be repeated, the usual calls for selectivity have made an appearance. Firms are also relatively warm on emerging market debt – though this is a long way from the enthusiasm of previous years.
Different states
If fund firms remain upbeat about US equities, another consensus remains hard to shake. Our database shows passives remain easily the most widely held US equity funds among wealth managers.
With 2022 opening to a sell-off for big tech, DFMs may well consider the case for a more nuanced US allocation. There’s certainly a decent level of dispersion when it comes to how DFMs’ favourite active US picks have held up. On a three-year view, six of the 10 most popular funds in our database would sit in the top half of the IA North America sector by total return. Half of these have outpaced the S&P 500.
For some of these names, the usual caveat about past performance may serve its purpose. A stellar 2020 means Baillie Gifford American outpaces the index and active rivals over three years despite giving back some gains in the past 12 months. Another tech-heavy name, Loomis Sayles US Equity Leaders, lags over one year but stands out over three – though it has posted double-digit returns in both periods.
Some top picks take a different approach. Premier Miton US Opportunities has done well from a focus on leading mid-cap stocks, putting it in the top half of the sector over one and three years. Elsewhere a middle ground approach seems to have had mixed results: Artemis US Select, which recently combined a heavy allocation to tech majors with a decent weighting to mid-caps, sits in the fourth quartile over one year and the second over three.
Next leg
There’s no denying 2021 was another year of ESG, especially if you run an active fund. Calastone data has shown ESG demand buoying active fund sales, and the firm’s latest update rams home this point. Global equity funds were the most popular sector in December, and £6 in every £10 here went to an ESG product.
There’s plenty to come on this front, from efforts to clarify ESG labels to the potential for product development. But Calastone notes a silver lining for one battered asset class. The research firm observes that ESG investing has started becoming “a meaningful driver” of demand for fixed income funds, with a quarter of last year’s inflows having such a slant.
In what could be a dicey year for bonds, that’s one source of hope. If new products follow, it could also make DFMs’ ESG portfolios less likely to crowd into a small handful of bond funds.
