Patient capital: Full steam ahead?

Do investors need greater access to illiquid assets? The debate has long been of interest to wealth managers, and in recent month it's attracted the attention of HM Treasury, too. Now it’s the FCA’s turn to take a look, via the publication of two papers on all things patient capital and barriers to investment in the space.

Much of the regulator's focus is on pension investment, but one striking point raised in its discussion paper relates to retail funds, and whether they should be able to dive deeper into the illiquid asset space. 

As the FCA notes, Ucits vehicles can currently hold up to 10 per cent in unquoted investments, with a ceiling of 20 per cent for Nurs funds. 

It's now asked whether these structures should be changed, and/or whether it should introduce a new kind of retail fund offering direct access to unspecified patient capital investments.

Ucits rules are, of course, governed by EU regulations, but even the hint of a shift in direction will be enough to spark the interest of the investment industry: any eventual change to investment rules would be music to the ears of some fund managers. The Scottish Mortgage team and Merian's Richard Watts are among those to have delved into private markets lately in the search for alpha. And Neil Woodford, whose Income fund has been on the verge of breaching the 10 per cent limit in the past, could have done with restrictions being eased before now.

Either way, any decision to give open-ended funds more flexibility would only increase the interest in unquoted investment from equity managers looking to gain an edge. From a fund buyer's perspective, that may have one particular consequence. 

We’ve noted before that looking beyond public markets has been a way for some of autumn’s equity investment trust launches to stand out from the competition.

As with separate FCA proposals for property funds, any change to authorised fund rules would create winners and losers. But as with the property sector, it might be the halfway houses - open-ended funds offering daily liquidity together with partial exposure to illiquid assets - that ultimately prove of most interest to wealth managers.

Plan of inaction

Whether it’s Kames losing its second bond team in 18 months or Neptune’s Rob Burnett deciding to go it alone, recent developments have been a reminder that manager moves can still come out of nowhere to surprise fund selectors.

But the lesson from recent departures is that manager exits don't necessarily mean investors rush for the exit door as well. Patient capital is becoming the modus operandi here, too.

In part, this is down to better planning by fund providers. That's most easily illustrated in cases where a high-profile manager retires: the lack of a shock factor gives firms plenty of time to prepare the ground.

And so it's proved with the impending departures of Nigel Thomas and Ian Spreadbury. Both managers' flagship funds have continued to see outflows since their retirements were announced, but Morningstar data shows the pace of redemptions has more or less remained the same before and after the news.

The same principle applies at Baillie Gifford, which has seen its Japanese funds continue to gain assets since Sarah Whitley handed over the reins to Matthew Brett.

A bigger test comes when manager exits come out of the blue, But here, too, investor exoduses are becoming less common. JPMorgan Global Macro Opportunities, for example, has seen also seen inflows continue over the past year despite the sudden departure of multi-asset boss Talib Sheikh to Jupiter.

The greater emphasis on team management styles has doubtless helped. And working alongside the diminished focus on "star managers" are the legacy assets that form the bulwark of many funds.

Such money is fairly immovable come what may, which helps create a sense of calm in the aftermath of a move. Funds like L&G UK Special Situations, which hasn't dramatically shrunk in size since Richard Penny left for Crux, might be an example of this effect in action.

What can DFMs learn from these changing trends? As chopping and changing allocations becomes less common, one consequence is that it's also becoming harder for fund managers to quickly build scale at their new firms. That's particularly the case when the marketplace is already saturated with products. Simply put, wealth managers are more or less content with their existing options - and don't feel the need to branch out unless absolutely necessary.

Ease-y does it

All the attention devoted to UK politics and US growth in recent weeks has meant Europe has faded into the background a little. 

Today's ECB meeting, at which Mario Draghi is expected to outline the fate of the bank's QE programme, has been the least of investors' concerns of late. But European monetary policy could yet cause some upset in 2019 if policymakers fail to maintain their delicate balancing act.

The consensus is that Mr Draghi will outline a "dovish tightening" today, announcing a capping of the QE programme while signalling no rate rises for 2019 - and hinting that other levers could be pulled to avert a slowdown if need be. 

Much of the concern has been about what will happen if a slowdown does take hold - or whether monetary tightening will hurry on that slowdown. A slightly different point of view comes from Liontrust's David Roberts, who says central Europe is, in fact, overheating already. 

"If the euro weakens as the Fed raises rates more than expected, we may see growth and inflation spike to the upside", he says, which means a "material chance of higher interest rates" by the middle of next year.

Whatever way the cookie ultimately crumbles, the picture's looking less clear than it once was. Add a new ECB president, and continued worries over France and Italy, and Europe looks like just one more difficult asset allocation decision for 2019.