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An unusual anniversary passed by over the weekend. Bespoke Investment Group notes that it has been two years since February 19, 2020 – the date on which the S&P 500 made its last closing high before “all hell breaking loose” the following month - and we all started becoming rather too familiar with the inside of our homes.
Broadly speaking, the two years since have delivered in spades as far as mainstream equity indices are concerned. But that belies a great deal of nuance: Bespoke highlights the fact many US shares have recently given up their post-Covid gains - to the extent that around a third of the Russell 3,000 index is now down from the pre-Covid peak.
For better or worse, there’s plenty going on below the surface.
Unsurprisingly, a good deal of this relates to sector movements. Bespoke notes that half of healthcare, real estate and utilities stocks are down from their prices on February 19, 2020. By contrast, nearly 85 per cent of materials stocks have managed to hold onto their post-Covid gains.
The sector effect is obvious enough in the funds universe, too: if we look at the IA North America cohort’s performance from the pre-Covid peak to now, four of the top 10 are sector funds, covering tech, consumer discretionary shares and materials respectively. Two other names on the list are Nasdaq-100 ETFs, and arguably act as tech plays.
What’s interesting is the mixture of funds focusing on quality growth sectors and more cyclical offerings: beyond these examples, energy funds also sit fairly high up in the performance table.
On aggregate, it seems investors of all stripes have made hay since those pre-Covid highs – though things will tip one way or the other as 2022 rolls on.
One way street?
The above is more than an academic discussion for DFMs, given their growing tendency to use specialist global funds in recent years. But it seems those picking satellite holdings have broadly leant into the trends that dominated before the talk of inflation, rates and rotations became more vivid.
The chart below shows the most popular specialist global equity funds from our database of DFM holdings from mid-2021. While still plucked from a small sample, this selection is telling about the thinking of the time.
Making up 15 per cent of specialist selections, Polar Capital Global Insurance is the most popular name on the list. But it bucks a much bigger trend: every other name with a decent level of support focuses on tech, or some part of the healthcare space.
These have had mixed results given the recent sell-off for growth: the tech funds remain ahead of the MSCI World index for the two years since the S&P 500’s pre-Covid peak mentioned earlier - but now look under pressure. All the healthcare funds already lag the index over that period, though all are in the black.
It’s the insurance fund that has fared the worst, achieving a total return of just under 5 per cent over that two-year period. But its underwhelming performance could well turn around as financials enter a warmer environment.
What’s more interesting is whether selectors reshuffle their specialist picks to reflect changing times.
With equity markets wobbling, it’s no surprise that junk bonds have hit the buffers so far this year. Three weeks into February and every fund in the IA Sterling High Yield Bond sector is in the red.
Considering the optimal conditions of 2021 and intensifying concerns about inflation, a year of lower returns may well be in order for riskier bonds.
But so far some metrics from overseas are pointing to a sector in rude health. Bond specialist TwentyFour Asset Management notes that the ratio of credit upgrades versus downgrades in US high yield has remained strong this year, according to Standard & Poor’s.
So far this year S&P has upgraded 48 names versus 28 downgrades – giving a ratio of 1.71, where anything above 1 reflects the balance tipping in favour of upgrades.
To give some context, the ratio hit a 10-year high of 1.92 in 2021, a strong rebound from the low level of 0.22 in 2020.
In current circumstances the winners of 2022 look few and far between. But high yield may yet cling to some of last year’s glory.