Asset AllocatorNov 16 2018

The fund strugglers still favoured by wealth firms; US dominance not over yet

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Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs. We know you're bombarded with information, so each day we'll be sifting through the mass to bring you what you need to know, backed up by exclusive data and research.

 

Wealth firms stick by the laggards

As we noted earlier this month, DFM fund picks typically do a better job of beating benchmarks than the average portfolio. But it's obvious that not all asset managers can hope to beat the market at any one time - meaning any buy list will inevitably contain a few funds that are relative underperformers. 

As often as not, this will be for style reasons rather than a major blow-up on the part of a manager. But deciding whether to stick or twist can be a difficult decision in either scenario.

With that in mind, the chart below outlines the 10 most popular funds in five equity regions, as ranked by our MPS tracker, according to which quartile they land in by three-year returns. 

The proportion outperforming their respective sector lie below the black line; the proportion underperforming sit above it.

Clearly, DFM favourites have fared particularly well in the UK and global equity sectors. In the former case, that may suggest wealth managers are quicker to lose patience with domestically-focused funds - particularly given the variety of other options available. 

An alternative explanation is that longstanding favourites, such as Lindsell Train UK Equity and Liontrust Special Situations, have simply continued to perform well, meaning there's been no need for a change of heart from DFMs.

What else can we learn? The idea that active managers struggle to beat the US market is now so entrenched that it's almost a cliché, so it's significant that even US equity picks are proving more reliable than those in Europe. Just four of the 10 most popular choices on the continent are ahead of their sector over three years.

What's not shown are the EM and Asia Pacific ex-Japan regions. We've already discussed how EM equity has been a blind spot for wealth managers of late. And by the metrics outlined above, Asia ex-Japan is also struggling. 

Though neither EM or Asia have as many underperforming popular funds as Europe, they do have more fourth-quartile laggards - including Schroder Asian Total Return, Fidelity Emerging Markets and Stewart Investors Asia Pacific Leaders. Some have only just slipped down the rankings, but either way, these managers' reputations are likely to ensure they remain popular choices for some time to come.

US vs the rest isn't over yet

Why would anyone be happy about this month's sell-off? An underweight to equities is probably a decent reason, as is a high cash allocation. And others have viewed the volatility as curtailing a worrying development - the US market's disconnect from the rest of the world - but they may be mistaken.

One of the many red lights to have flashed in markets this year was the 'decoupling' of US equities from global stock markets, in the sense that the former has driven the bulk of the latter's 2018 returns. A divergent summer meant non-US markets had lost money or stayed relatively flat in the first three quarters, even as America prospered.

October's gyrations have done a good job of wiping out much of the returns that have been made across the Atlantic. Some may have assumed that the high-profile fall in US equities, and in particular the tech-heavy Nasdaq, meant they were, once more, moving in sync with other stocks.

The data is not pointing that way just yet. A look at the performance of the MSCI World index versus its ex-USA counterpart explains this well: as of late last week the latter index was down 5.8 per cent year to date. With the US included, it had gained 2.3 per cent.

That gap is much the same as it was at the start of October. A more significant tech sell-off, or some improvement in sentiment for the rest of the world, is still required if the US is to fall back into the pack.

No more waiting it out for investors?

US market falls commanding more attention than those elsewhere has meant some investors buying the dip: US equity funds saw inflows in the week to 24 October, according to EPFR, a small reversal of the outflows seen the previous week even as the S&P 500 continued to suffer.

The idiosyncrasies of UK retail fund flow data mean we'll have to wait a while longer to find out what was happening domestically in terms of investor appetite these past few weeks. What we can examine is flows for September - which already feels like a long time ago. What were wealth managers (and others) buying before the slump?

The answer, in short, is not very much. One or two perennial favourites like Fundsmith Equity held firm, but even they saw a reduced level of inflows. Vanguard's US index tracker was the third most popular product, indicating plenty were happy to keep backing the surge seen in the world's biggest market. But on the whole, sentiment was already pretty subdued.

Fund flows are already tough to come by for all but the most popular portfolios, but a month in which just 25 funds took in a net £50m or more is a particularly poor outcome. The flipside is that just 20 funds saw that much money leave. All in all, most were content to sit on their hands and see what October brought. And as we now look forward to November, what to do next suddenly looks a much more complicated decision for fund selectors.