Equity exuberance?

Ponder for any length of time the sudden spate of equity-focused investment trust IPOs to have emerged this autumn, and the phrases "late cycle" or "top of the market" will surely come to mind.

How else to explain the arrival of multiple different trust launches in the spate of four weeks? And all focusing on equities at that, rather than the alternative investments that now make up the vast majority of such new issues.   

True enough, Smithson, Terry Smith's new investment trust, gathered more than three times its original fundraising target last week. But a rather more low-key announcement – for the British Empire trust's Japan spin-off on Friday afternoon – doesn't suggest irrational exuberance.

The Japan trust raised £86m, less than its £100m target. Mark Mobius, meanwhile, raised half of a more ambitious £200m goal in late September. Respectable, but a sign that wealth managers – whose participation still makes or break the vast majority of trust launches – aren't exactly piling in en masse.

One big barrier to wealth manager interest is model portfolios themselves. Out of 450 equity-based funds held recorded by our MPS tracker, just 21 are investment trusts. That number could tick up slightly if more trusts focusing on unlisted shares start to surface. The success or otherwise of Merian Chrysalis's £200m fundraising, results of which are due next Thursday, will demonstrate whether or not that's a plausible theory.

For Terry Smith, the issue is how to avoid the fate of his high-profile predecessors. Previous trust record setters have either quickly crashed and burned – a la Kleinwort European Privatisation in the mid-1990s – or, in the case of Anthony Bolton and Neil Woodford, marked a top-of-the-market moment of a distinctly personal kind.

MPS Tracker: Asia vs the emerging market complex

The rollercoaster ride for Asian equities has continued this morning via a rebound in Hong Kong. That volatility is par for the course, particularly during a tough period for emerging markets as a whole. At the same time, structural changes to how wealth managers access the region are giving pause for thought.

The long-term prospects mean DFMs aren't exactly throwing in the towel - but they are thinking harder about which fights to enter.

In recent times one answer has been to shift more forcefully to Asia Pacific ex-Japan, which gives exposure to high-growth economies while avoiding problem areas like Russia and Brazil.

Our asset allocation database underlines this shift: around half of all balanced model portfolios now hold more in Asia ex-Japan than they do in the broader emerging markets category. Indeed, the typical balanced model portfolio now has 4 per cent invested in Asia ex-Japan, higher than the 3.8 per cent allocated to a separate emerging market category.

What's notable about the last few weeks is that it's Asia which is suffering just as much, if not more than, the likes of Brazil and Russia. The trade war and tech sell-off are partially responsible, but so too is a sudden slump in sentiment in India, one of active managers' most popular hunting grounds.

Irrespective of market performance, wealth managers are starting to review whether they are doubling up in their allocations. This summer, Albert E Sharp said it had eased its own concerns by buying an EM income fund that has little in Asia ex-Japan.

Indexation is also a factor: other wealth managers privately say they are reviewing their own exposures to ensure that Asia's growing dominance of emerging market benchmarks doesn't mean they erase the diversification benefits of separate Asia allocations.

Whatever the headlines about volatility, avoiding this kind of replication may ultimately prove more important than the short-term direction of the asset class.

No easy calls when it comes to macro

A final point on EM this morning: it's not a contained issue. Unsurprisingly, it's not just China specialists gritting their teeth as sentiment starts to turn on the country. Exporters in Japan and Europe have started to get dragged down again, too.

China sneezing has long meant ill-health for more than just Asia. By the same token, the country's reach nowadays means bears are ruling out more than just commodity exposures. The likes of consumer discretionary stocks and technology, for instance.

So one particularly notable fund selection move of recent weeks, given all the talk of China, has been a decision by Premier's multi-asset team to exit a position in Alastair Mundy's Investec UK Special Situations fund.

Mr Mundy's top-down views, particularly on China, "have constrained the opportunity set" in recent times, according to Premier. 

His replacement, Aberdeen Standard UK Recovery, stands in contrast to this because of its manager's "willingness to not allow macro views to dominate".

Premier is wary of top-down approaches in general. Here's Simon Evan-Cook from Premier on the decision:

What we want is the managers to have the freedom to find the best set of opportunities. If we run a macro process there's a tendency to turn an entire fund into one single bet.

If we take the extreme macro fund it's a lot harder to predict what happens with an economy that has millions if not billions of moving parts; a company has fewer variables.

A clear word of caution for those seeking to limit their emerging market exposure. We'll be examining more of the most interesting asset allocation calls of Q3 over the next few weeks.