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Wealth managers' UK equity trust issues; Fund selection shifts in the spotlight

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.

 

Trust in me

Amid all the renewed concern over Brexit's impact on domestic risk assets, there's one type of investor that seems pretty relaxed about the whole thing. As the Lex column points out this morning, the average discount on UK investment trusts has fallen to a seven-year low of just six per cent.

Ignorance or a canny bet? That might just depend on who exactly is buying these shares. We've spoken before about the barriers to trust take-up among DFMs, but interest is rising as even markets stutter.

Of the four investment trust IPOs that took place in October, three fell short of their stated targets. Yet the £2.2bn raised from launches and secondary fundraisings during a month of turmoil is the highest figure for five years, according to Winterflood.

Some of that money will have come from DFM coffers, and we already know that some many have overcome their traditional aversion to the closed-ended structure, even within MPS.

In Money Management's annual survey of the DFM industry, 21 of 27 respondents said they now included trusts within their core portfolios. 

But our own MPS tracker confirms that much of this activity is confined to areas like the property sector, where almost two-thirds of holdings are in closed-ended funds, and niche asset classes such as loans. 

Across all funds in our database, the picture's very different. Trusts made up just 6.7 per cent of all holdings as of the start of the quarter. For equities, that falls to just 2.8 per cent, as the chart below sums up.

So it may be a different calibre of investor, coupled with better discount control mechanisms on the part of providers, that is helping maintain UK trusts' share price.

We shouldn't write off wealth managers' role entirely, though. Not only is their presence required to get launches off the ground - DFMs' growing size means their names are also now usually found among the upper reaches of trusts' shareholder registers. Given discretionaries have topped up on UK equities in recent months, they could well be a factor in trusts' surprising resilience, too.

 

Buy/sell: Some notable portfolio moves

The typical wealth firm is no fan of portfolio churn, with good reason. Active management is rarely a story of funds generating big overnight wins, and the asset price increases of recent years have strengthened the argument to buy and hold.

But with markets looking less predictable, big shifts may lie ahead in both asset allocation and fund selection. Our MPS tracker shows that some of these are already in motion.

Interestingly, though, it's the firms at the smaller end of the spectrum that made the biggest changes in advance of the current quarter. Few of the big players felt the need to rock the boat ahead of Q4 - notable shifts for this group were few and far between.

Further down the scale, there is evidence of a couple of well-timed de-riskings. Rivers Capital reduced its Balanced portfolio exposure to equities by 13 percentage points in the summer. The firm added 9 per cent to bonds and 5 per cent to alternatives. Clarion, meanwhile, added nearly 6 per cent to short duration bonds within its unitised funds.

When it comes to fund selection, one or two changes stand out for going against the grain. Apollo sold a portfolio that remains one of the most popular equity holdings in our database - Hermes Asia ex-Japan - in favour of the Matthews Asia ex-Japan Dividend strategy. We'd note that the new fund also has less of a tech bias as well as the income focus.

Recent weeks have also brought news of a big manager move: the announcement of the impending retirement of Fidelity's Ian Spreadbury. Yet there's been little sign of wealth managers moving away from his portfolios.

In fact, the most distinctive shift was actually in the form of one discretionary buying Fidelity Moneybuilder Income. In contrast to Clarion's move, this switch was made in order to remove a short duration bias. It might just sum up the lack of consensus over what, exactly, DFMs should be doing next.

An emerging market dislocation for EMD

A final note on bonds for the week. In testy times, emerging market debt isn't likely to be top of anyone's buy list. Of course, there's the argument that "value is emerging", as the euphemism tends to go during a sell-off. And it's true that EMD has actually begun to outperform other parts of the bond universe since September.

The unusual thing is how this relative resilience is being reflected in spreads. M&G's Bond Vigilantes have flagged the fact that EM corporate spreads are now trading inside EM sovereigns' by the largest amount since 2006.

They list a few possible reasons for this: government debt is having to put up with worries over Turkey and Argentina spreading to other sovereigns, while corporates have been helped by stronger returns in Asia, in particular, as well as rising hopes of a trade war truce.

Add to that the recent plunge in the oil price and things are looking a little more rosy for Asian businesses. Whether these factors are enough to convince DFMs, historically rather reticent to get involved with the asset class. is another matter.

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