Fund favourites keep up the pace; The end of open-ended as we know it (and DFMs feel fine)?

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Earning their crust

From Terry Smith’s (slight) 2021 underperformance to the Nick Train’s recent woes, some of the funds best known to DIY investors are facing much more scrutiny than normal right now. But it’s not a phenomenon exclusive to the retail crowd: professional fund buyers will also be kicking the tyres on their top holdings amid the recent uncertainty.

While diversification remains the name of the game, the chart below suggests the 10 equity funds appearing most frequently in our MPS tracker are earning their crust for now, as judged by the proportions that sit in different sector quartiles for three-year performance.

As discussed last week, DFMs’ favourite US equity funds have fared well on this measure, and the results have even improved since then. The picture is similar for the most widely held global funds, with seven names in the top half of their peer group.

DFM picks are doing well in some other concentrated markets: an overwhelming nine Asia favourites would sit in the top half of the peer group, from Veritas Asian to Schroder Asian Alpha and Stewart Investors Asia Pacific Leaders Sustainability. It’s a similar picture in emerging markets, while six European equity names have had a good three years.

Yet questions will be asked elsewhere. Just four Japan funds made it into the top half, with half of the UK names doing the same. This may partly be an effect of timeframes: Man GLG Japan CoreAlpha’s fourth quartile rating over three years does little justice to an excellent 2021, for example. With talk of market rotations still doing the rounds, buyers may well ask which period of performance is more telling.

Open-ended?

Whether it’s prerequisites relating to size, the sheer amount of choice already on offer or limited hours in the day, buyers have good reason not to get too excited by fund launches. But new figures suggest an easing of the new product deluge, at least on one front.

Some 138 UK-domiciled mutual funds and ETFs launched in 2021. That’s a reasonable drop from 2020’s 182 and, as the chart shows, it’s the second lowest annual tally in a decade.

One explanation might be the usual argument about uncertainty stymying activity: with market rotations and inflation worries permeating the last year, some firms may well have held off from product launches. But this seems unconvincing, given big market gains and rampant M&A activity did not suggest an overwhelming sense of investor pessimism.

Another theory relates to the data itself. The numbers do not touch on the enormous level of fundraising for new and existing investment trusts in the alternatives space. Given that many ETFs available in the UK are not in fact domiciled there, the chart also fails to reflect a proliferation of names in the space. Similarly, asset managers could still be busier with offshore products than those housed in the UK.

Either way, that may be a reassurance to DFMs overwhelmed by new launches – as will the idea that they can perhaps focus on quality over quantity. Roughly a quarter of the 2021 launches had an explicit ESG focus. Given that preferences here can be idiosyncratic, allocators may well find themselves seeding specific new products, as discussed in one of our podcasts last year.

Yielding to the inevitable

Time to savour an unconventional piece of good news from the bond market. The drift towards monetary tightening has seen the stockpile of negative-yielding fall to $10tn for the first time since April 2020 as bond prices fall, as reported last week by the FT.

With negative yields even having penetrated the high yield space at points, this could be a welcome side effect of recent (and future) attempts to move away from the extreme monetary policy of the past decade. If that will be a slow process, and likely not without hiccups, some may relish a return to normal - of sorts.

How close we can get to the interest rates and bond yields of days gone by is another question, and not an easy one. And with bond yields on the march upwards for now, allocators may also wonder where exactly they look attractive again.