Recent months have seen investors pay more attention to defensive strategies such as those in the IA Targeted Absolute Return, IA Volatility Managed and IA Flexible Investment sectors while turning their back on the UK and fixed income, research by FE Trustnet suggests.
While the summer months marked the 10‐year anniversary of the start of the global financial crisis, stock markets were at close to record highs and government bond yields continued to sit at near-historic lows.
Added to this, market volatility as indicated by the VIX index – often called Wall Street’s ‘fear gauge’ – was hovering at its lowest levels in decades while the global economy appeared to be in rude health.
However, this all comes at a time when investors have plenty of potential risks to point to, whether they be the UK’s move to depart the EU and the resultant strains on domestic politics, Donald Trump’s challenging presidency in the US, North Korea’s nuclear weapons programme or geopolitical conflict in the Middle East.
IA Targeted Absolute Return research share over time
Source: FE Analytics Market Intel Tool
We used the FE Analytics Market Intel Tool – which shows the research behaviour of the professional fund pickers using FE Analytics – to find out if this was affecting what financial advisers, wealth managers and other investors have been looking at.
To do this, we worked out the average share of research activity that each Investment Association sector captured going back to the start of 2012 then found out which have attracted more attention that historically typical over the past three months.
This showed that the IA Targeted Absolute Return sector has seen the largest uptick in interest over the past three months. While the peer group’s average share of total Investment Association research stands at 4.50 per cent, it has grown to 5.05 per cent more recently – largely down to a spike in interest in September.
Adrian Lowcock, investment director at Architas, said: “This is a sign that professional investors are definitely more wary about where the next leg of this bull market could come from.
“However, there can be a concern if people suddenly increase their defensive exposure – especially cash – ahead of the market turning. Too many people are probably waiting for that correction to happen, but that might mean it may never actually come around.”
Source: FE Analytics Market Intel Tool
Over those three months – August, September and October 2017 – the most heavily research IA Targeted Absolute Return funds were Standard Life Investments Global Absolute Return Strategies, Newton Real Return and Invesco Perpetual Global Targeted Returns, all of which have a strong following from professional and private investors.
Other sectors that suggest investors are looking at more defensive options include IA Volatility Managed, where the most popular funds over the past three months have been Standard Life Investments MyFolio Managed III, Rathbone Total Return Portfolio and Standard Life Investments MyFolio Market II.
The IA Flexible Investment sector has also seen an uptick in interest during recent months. While this is the riskiest of the four multi‐asset peer groups, the most researched member is Troy Asset Management’s Trojan fund – which is run with capital preservation firmly in mind and has tended to perform well in downturns thanks to structural allocations to gold, cash and index‐linked bonds.
IA Mixed Investment 0‐35% Shares – the lowest risk of the Investment Association’s multi‐asset groupings – is another cautious sector witnessing an increase in professional research activity. Popular funds here include Jupiter Distribution, Fidelity Multi Asset Income and Vanguard LifeStrategy 20% Equity.
Where investors are taking risk, there appears to be greater appetite for sectors with more attractive valuations as European, Japanese and global emerging market equities are all receiving higher than average interest from professional investors.
IA Europe ex UK, Japan and Global Emerging Markets sector research share over time
Source: FE Analytics Market Intel Tool
“With Europe and Japan, this interest is down to a combination of valuations and growth,” Lowcock said.
“Japan has seen some good economic growth over the past year while Europe’s economy is much stronger than anticipated. We’ve also had decent global growth come through, which is supportive for investors taking a bit more risk in areas like Japan and Europe.”
Looking at the bottom of the table and the data shows that professional investors have been spending less time looking at UK and fixed income funds.
While the IA UK All Companies sector remains the most heavily researched peer group on FE Analytics, its share of total research has fallen by quite a margin in recent months.
This is down to the uncertainty surrounding the country at the moment, given the ongoing negotiations to leave the EU and the narrow majority held by the government.
There are also few surprises that bonds are seeing little interest from financial advisers and other professionals, given that central bank policy is not as loose as it used to be.
“It’s predictable that investors are looking less at bond funds given that interest rates are rising and making them less attractive,” Lowcock said. “But arguably you should be doing more research in this situation as you need to find the funds that are the best in down market.”