Fund firms double down on risk assets, ESG shakes up passive plans, & Budget boost for DFMs

Positivity rising

Fund manager sentiment may be starting to wobble, but when it comes to risk assets, fund management firms are as confident as they ever were.

That’s the main conclusion from our latest gauge of fund houses’ asset allocation views, displayed in the chart below [chart available exclusively to newsletter subscribers]. Compare this with the prior version, published in July, and there’s little sign that September’s market struggles have dampened enthusiasm.

In fact, when it comes to equities, sentiment is still on the up. There’s been a slight cooling of affections where Europe is concerned, but a sizeable proportion of firms in our sample are still positive on regions ranging from the UK to the US and Japan.

Notably, the number who are outright negative has also fallen further. Only in Asia ex-Japan does this negativity show itself in any real way.

Positive views are also in abundance when it comes to high-yield debt. But sentiment on other parts of the bond universe does appear to have been affected by the events of recent weeks.

Negativity towards government bonds has increased still further, and increasingly attractive yields haven’t yet moved the dial when it comes to EMD opinions.

Views on investment grade debt are arguably the most surprising. Credit often catches a cold when the government bond market sneezes, but IG bonds have been a mainstay of most investor portfolios for some time now.

As it stands, however, just one in 10 asset managers are positive on the asset class at the start of the fourth quarter – and almost half are outright negative.

Options abound

It’s not often we write about fund launches in this newsletter. But the $200bn QQQ ETF, on which the new product in question is based, is one of the largest funds in the world, and the second most-traded ETF.

As of today, the Nasdaq tracker now offers a sustainable version alongside the conventional ETF. That’s not a surprisingly development in this day and age. But the thinking behind the move is worth considering.

Firstly, it arguably speaks to passive providers’ concerns about being left behind by the age of ESG.

In Europe, where fund choices are starting to be governed by the Sustainable Finance Disclosure Regulation, that worry is particularly apparent. But passive providers in every jurisdiction will be aware that the indices they track might no longer fit the bill for many investors.

The fact that this latest move relates to a tech tracker merely underlines the above point. Some might think that such strategies – passive or otherwise - are well-equipped to prosper in the world of ESG. But many tech giants have issues of their own on this front.

For that reason, the likes of Tesla, Amazon and Facebook have markedly lower weightings in QQQ’s sustainable version. Conversely, the likes of Apple, Microsoft and Nvidia will become more dominant.

As a result, the top two holdings account for more than 27 per cent of the sustainable fund – compared with 21.5 per cent in the regular version. Overall, however, the top 10 holdings are fractionally less concentrated than they were before.

Whether this particular metric matters to allocators will depend on their personal investment philosophies. But come what may, the rise of ESG has the potential to reshape indices in the months and years ahead.

Gilt trip

Today’s Budget didn’t, in the end, have anything to materially concern the wealth management industry. The tax rises announced on September 7 ended up being far more significant than anything announced by the chancellor today, or hidden in the Treasury’s accompanying documents.

If anything, wealth portfolios will have received a bit of a fillip. The FTSE was largely unaffected by the day’s events, but government bonds were paying attention.

Drastically reducing borrowing requirements for the current tax year pushed gilt yields down markedly, from 1.1 per cent to below the 1 per cent mark. Whether those spending decisions ultimately prove helpful for the UK economy is an open question. But for now, DFMs are reaping the benefits.