- Asset management outlooks for the year suggest a balancing act will be necessary in 2021
- Many want to play a cyclical upswing but they are still avoiding certain classic value markets
Asset managers have many advantages over the humble private investor, from a small army of analysts to time with company management. But retail investors can still succeed, in part by observing what the professionals are up to.
The Investors’ Chronicle Ideas Farm is one example of this in action, with our regular breakdown of fund managers’ best ideas hopefully providing inspiration for further research.
Similar thinking applies to asset manager market outlooks. Analysing how fund firms are positioned on different markets can highlight the markets that still have momentum behind them, while also pointing to crowded trades and contrarian plays.
With this in mind we have revisited a format from last year, where we collate a selection of 2021 outlooks from major asset managers. The results offer some valuable insights, detailed in the chart below.
Equities: structural growth versus the 'cyclical upswing'
A key debate among investors is whether the cyclical rally witnessed in November 2020 can continue as lockdowns draw to a close. And many wonder whether structural growth stories accelerated by the pandemic, including the digitalisation of work and everyday life, can sustain their momentum. Asset managers appear to be attempting to play both trends – but with important nuances.
US equities remain strongly in favour despite concerns that the trends driving big tech’s phenomenal 2020 returns might falter. 60 per cent of asset management firms in our sample are positive on the region, although this popularity also relates to the belief that US small-caps should prosper from greater economic growth.
BlackRock, which upgraded US equities to an 'overweight' position in its global outlook for this year, notes: “We see the tech and healthcare sectors offering exposure to structural growth trends, and US small-caps geared to an expected cyclical upswing in 2021.”
Both sides of the US story can be played via funds. Funds that have benefited from pandemic trends include Baillie Gifford American (GB0006061963), but if you are looking for a small-cap play options include Federated Hermes US SMID Equity (IE00B8JBCY79), which we analysed in the issue of 8 January.
Perhaps surprisingly, asset managers are less positive on Asia and emerging markets, which offered exceptional returns in 2020. Their reluctance may be because these big gains could be more vulnerable to a pullback. For example, Pacific Horizon Investment Trust (PHI), which is run by Baillie Gifford, made a share price gain of 128.5 per cent in 2020 and its largest holding, Sea (US:SE), a digital entertainment and e-commerce business, was up nearly 400 per cent. While investors might consider taking profits after such extreme returns, names like these are a good play on structural trends.
Asia and emerging markets also look well placed to benefit from any uplift in economic activity. JPMorgan Asset Management notes that emerging market equities, alongside US small-caps, are “well exposed to the broadening recovery”.
In the US and Asia, markets and funds tend to have heavy exposure to growth stalwarts such as Facebook (US:FB), Apple (US:AAPL), Amazon (US:AMZN), Netflix (US:NFLX) and Alphabet (US:GOOGL) – the so-called FAANGs – and Chinese tech majors. If you are looking to benefit from a cyclical upswing you should check exactly how funds are positioned and if they have enough exposure to economically sensitive sectors.
Left behind
The UK offers cyclical exposure and tends to look cheap, but not a single asset manager in our sample was positive about it. This was in part due to the prospect of continued difficulties related to the implementation of Brexit. Asset management firms are also not hugely positive on Europe, another market with cyclical elements.
UK assets performed strongly on the back of vaccine news in November and could continue to perform well if Brexit uncertainties abate. Brave, value-minded investors may be interested in funds such as Man GLG Undervalued Assets (GB00BFH3NC99). Growth-orientated funds such as CFP SDL UK Buffettology (GB00BF0LDZ31), meanwhile, may lag in a cyclical rally but fare better in the longer term.
Similarly, Europe funds with a value tilt, such as LF Lightman European (GB00BGPFJN79), could benefit from a continued cyclical surge. But Premier Miton European Opportunities (GB00BZ2K2M84), whose managers select holdings on the basis of their own merits rather than due to sector considerations, may stand out due to their ability to invest well through thick and thin.
Bonds still ahead
While bonds tend to have less impact on portfolios than equity allocations, it is useful to see how sentiment is playing out here. Asset managers are currently positive on corporate bond exposure, and it is the riskier high-yield sector that is generating the most enthusiasm. This is because riskier debt pays a more attractive level of income and high-yield bonds are more economically sensitive so should perform well in an upswing.
Maya Bhandari, multi-asset manager at Columbia Threadneedle, recently commented that higher-yielding corporate bonds “should benefit from the better cyclical picture, in addition to continued ultra-easy [monetary] policy”.
However, riskier debt in general has a high correlation to equities, so is likely to suffer at moments of stock market volatility. Due to the risks of high-yield bonds it makes sense to back funds run by experienced specialists such as Baillie Gifford High Yield Bond (GB00B1W0GF10). Royal London Sterling Extra Yield Bond (IE00BJBQC361), meanwhile, is not a dedicated high-yield bond fund, but tends to have a big weighting to this area.
