Short and sweet?

The mood music is sounding a little better for long/short funds nowadays. Sector correlations may be on the rise, but volatility has meant there's a decent dispersion of returns to be found. A case in point: half the S&P 500's constituents are currently up for the year, and half are down.

On top of that, many asset allocators are getting fed up with multi-asset absolute return funds and turning to long/short products instead. Around 20 of the latter feature in our fund selection database. Inevitably, a sizeable proportion focus on the UK, but there are also US, European and go-anywhere variants catching DFMs' eyes.

But as market conditions become more favourable for short sellers after years of pain, long/short managers are having to think more carefully about how to balance their books. The chart below shows the current gross long and short positions for wealth managers' portfolios of choice.

As the data shows, gross exposures vary significantly; the volatile City Financial Absolute Equity is a particular standout on this front. Equally important is that just six of the funds are net short.

Their number includes the City Financial fund, but also BlackRock European Absolute Alpha, Man GLG UK Absolute Value and Jupiter Absolute Return. Markets may be less buoyant than they once were, but few are turning outright bearish.

We should note that some funds will use options to increase their effective long or short positions. But from a gross exposure perspective, most are spreading their bets pretty evenly. Funds from Threadneedle and Artemis that are running much larger long books are the exception rather than the norm.

When it comes to the rewards accrued from recent volatility, the picture is equally mixed. Only five funds have managed to avoid losing money over the past 12 months, and three of those are US-focused. Of the large UK contingent, only Man GLG UK Absolute Value - one of those that's net short - is in the black. More may opt to follow its lead in the coming months.
 

Platform problems

For many in the world of retail investment, this year’s biggest bugbear hasn’t been market volatility, or new regulations, or even constant political uncertainty. It’s been malfunctioning investment platforms.

The past year has seen several major platforms attempt to upgrade the technology that powers them - Aegon/Cofunds, Alliance Trust Savings, Ascentric and Aviva being the main participants. Names aside, the A-Team they are not: almost every effort has led to a string of user complaints for months on end.

The success of on-platform model portfolio services mean that wealth managers have been caught up in these tech woes. Stuttering systems haven’t exactly helped those DFMs who have already sacrificed a degree of closeness to the customer by using platforms in the first place. 

On the plus side, the volume benefits of MPS have tended to more than compensate for this, and it’s fair to say that adviser clients will be understanding: their ire has been fully reserved for the platforms themselves.

Are there any positives to take? Some platforms have been introducing a wider range of investment products as part of their tech overhauls. That’s started to help DFMs minimise the differences between the MPS they run on different providers’ systems. Other relevant facilities, such as a wider range of decumulation options or improved access to DFM offerings themselves, are also being upgraded. 

The opportunity set isn’t really changing, either. This year may have tested the mettle of many advisers, but their unwillingness (or inability) to shift their business to a different provider remains intact. And 2019 is unlikely to see the same level of disruption; there are far fewer new replatforming exercises on the agenda for the coming months. 

Trust issues

One product which is gradually benefitting from platforms’ attempts to bring themselves into the modern age is investment trusts. More closed-ended funds are now being made available to users, and custody charges are lower than they once were - on many platforms there’s now no difference in cost between trading trusts and trading Oeics.

That’s important, because while there are still other structural barriers to holding trusts within MPS, overall charges are an important piece of the puzzle. Trust OCFs can look particularly pricey to wealth managers who are able to negotiate fee discounts on their open-ended holdings.

So it’s helpful that more investment company boards are now recognising their definitions of what constitutes a competitive fee have to change. This is even the case in the alternatives space: the pricey MedicX healthcare real estate trust cut fees just yesterday, and the average private equity trust fee has fallen by 34bps this year, according to Kepler.

The research provider notes that a total of 39 trust boards have now agreed to reduce management fees in 2018, while performance fee structures have continued to wither away. Admittedly, the average OCF has only fallen by four basis points. Of more relevance, however, might be the fact that 24 boards have introduced tiered fee structures. That will be of particular interest to larger wealth managers with an affinity for cutting deals.