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Wealth managers' coming capacity headache; Strategic bond standouts

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. 

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Sized up: a capacity management update

With most portfolios in the red last month, it’s unlikely that funds have been able to grow assets much of late. But 2018 wasn’t all that bad prior to the sell-off. The two sources of expansion available to retail funds – sales and market gains – had made for another fruitful year in many cases.

Yet there are few obvious signs of a fund capacity crunch, or soft closures for that matter. That said, we noted last month that several funds had exceeded previous capacity thresholds or seen marketing efforts dialled back.

A few weeks down the line, we hear of others who, with one eye on capacity, have stepped back from marketing a trio of funds - all of which are pretty popular with DFMs, according to our database.

Man GLG is understood to have ceased actively marketing its Undervalued Assets offering. Lingering Brexit worries proved no barrier to popularity for a fund that touts its multi-cap, contrarian approach. 

Capacity issues have arisen in more predictable areas, too. Polar Capital has similarly stopped marketing its Global Technology fund, which gives access to some of the most popular stocks of the moment.

Finally, it's understood Legg Mason has eased off promotional efforts for its popular (and volatile) Japan Equity fund.

The funds remain open to new investment, and October’s market difficulties may postpone any further action on this front. But all three may be eyed more warily by wealth managers from this point onwards.

DFMs' strategic bond favourites

From monetary tightening to broader late-cycle concerns, bond investors have plenty to worry about and very few places to hide. But the need for diversification in times like these means sticking by the asset class, one way or another.

One way to square this circle has been to use strategic bond funds. The flexibility they ostensibly offer means 80 per cent of wealth managers in our database use at least one such fund in their MPS.

Given the multiple headwinds facing fixed income, fund selections here are likely driven by a hunt for defensive characteristics as much as the income they provide.

For a closer look, we’ve unpacked the most popular choices as ranked by our MPS tracker. As a reminder, this database encompasses fund selections across more than 300 model portfolios run by 50+ DFMs.

The appearance of Jupiter Strategic Bond at the top of the list chimes would seem to confirm the defensive mindset:: manager Ariel Bezalel has maintained an aggressively bearish outlook lately, and will appeal to cautious allocators.

The same arguably applies in some other instances. Both Janus Henderson’s offering and M&G Optimal Income have more than two thirds of assets in government or investment grade bonds, for example.

That said, other increasingly popular choices point to a yearning for uncorrelated assets.

Take 24 Dynamic Bond, the second most popular choice. The fund does have some more conventional exposure, including government bonds. But it also invests in more esoteric areas, such as asset-backed securities. 

Similarly, Gam Star Credit Opportunities includes the likes of floating rate notes in its arsenal.

With many of the traditional fixed income plays looking threatened, going off the beaten path could well pay off. Either way, it’s unlikely DFMs will lose their appetite for go-anywhere funds soon.

All relative

Finally, a note about recent markets. Given the return of volatility, 2018 has become a time to sense-check the argument that active managers really do earn their salt in difficult environments. However, there are signs it may take a while for them to notch up any real gains.

As Ed Clissold at the Ned Davis Research Group observed this week, we've reached a stage where no asset class has risen by more than 5 per cent year to date. It's the first time this has occurred since 1972.

What does this mean? In the short term, managers with strong absolute returns will, of course, prove harder to find. Allocators may find themselves judging relative performance more than anything else.

One possible silver lining is that managers can, in theory, buy assets that maintain strong fundamentals but have found themselves dragged down by markets. But as market dynamics appear to shift, picking winners is no simple task.

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