Asset AllocatorDec 17 2018

New entrants face fund buy-list blockade; The king currency problem for allocators

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

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. 

Forwarded this email? Sign up here.

Outside influence

It sounds like a pretty good match on paper: DFMs who increasingly pride themselves on surveying a global fund universe, and overseas asset managers who see the UK retail investment market as a tempting growth prospect.

Consequently, one of the most common sights in fund management of recent years - before Brexit put the brakes on, at least - has been a US or European fund giant making a big push onto these shores. 

In reality, newer entrants have had varying degrees of success. But that variation typically only ran the gamut from underwhelming to disastrous.

Yet DFMs' willingness to invest in new ideas is, theoretically at least, greater than ever. We've tested out these competing trends by examining the popularity of overseas players in our fund holdings database.

It doesn't make for pretty reading. Collectively, firms such as T Rowe Price, Robeco, Macquarie, Wells Fargo and Carmignac account for less than 1 per cent of the holdings we track across 300+ model portfolios. Some firms that have targeted the UK, such as Candriam, still don't have a single offering included in those models. 

Even those taking an alternative tack have had little joy. Mirabaud, which took a different approach from its peers by hiring managers already known in the UK market, has not made a dent outside of its European small-cap fund.

There is one firm which has gradually been able to build up its presence - Goldman Sachs Asset Management. Unsurprisingly, that's been built on performance rather than a big marketing push. But it's very much the exception to the rule. 

Wealth managers are willing to look further afield when it comes to alternatives, or try regional specialists for US exposure in particular, but most other asset classes appear simply inaccessible to overseas managers. Their best chance of getting on DFMs' radar remains, for better or for worse, a merger or an acquisition.

King conundrum

When you've reigned for a long time, rumours of your death sound more credible each time they arise. So it is with king dollar: for the first time in at least four years, investors now think the greenback is more likely to decline than rise in value, according to ASR.

Those rumours often prove greatly exaggerated. The dollar's relative power waned last year, but it's been on an upwards path again for much of 2018, and the spot index is now at year-to-date highs despite talk of the Fed's tightening cycle nearing an end. 

Needless to say, its future fortunes will have implications for a number of asset classes. Perhaps the most interesting, given the knock-down valuations currently on offer, are the emerging markets - both equities and bonds.

When it comes to EMD, the options extend into corporate versus government bonds, and, most pertinently, dollar or local currency debt. With the dollar's ascendency in the balance, our database suggests wealth managers are mainly playing it safe for now. 

Funds without an explicit currency bias are much more widely held than those dedicated to either dollar or locally-denominated debt. And the go-anywhere names also appear to be erring on the side of caution.

M&G Emerging Markets Bond, the most popular fund in this area, still has a preference for dollar-denominated assets. At the end of October it had nearly 70 per cent of its assets in hard currency. Ashmore EM Short Duration, the second most popular name, only uses holdings denominated in US dollars and other G7 currencies.

Collectively, the number of instances in which DFMs hold funds with a “local” focus does admittedly outnumber explicit US dollar-denominated plays. But these labels can prove misleading: Barings EM Local Debt, for one, uses a mix of hard and soft currencies. 

A final option for wealth managers comes via the ability to hedge such holdings. As we’ve discussed, that's a strategy that can come with its own problems, and true enough few DFMs are currently showing a willingness to take the plunge here. Just one wealth firm explicitly says it hedges its EMD fund positions.

Retailers rattled

It goes from bad to worse for UK retailers. Mike Ashley predicted last week that they'd be "smashed to pieces" by a tough November, and news from Asos this morning has revealed those woes aren't confined to the high street.

The online retailer's profit warning has been an eye-opener for those who thought online shopping was relatively insulated from a consumer slowdown: shares are down some 40 per cent, meaning it's now lost almost two thirds of its value this year. 

From a DFM perspective, the good news is that most fund managers have already banked profits on what was, until 2018, one of the biggest Aim winners of recent years. Few UK or global equity funds of note now count the company among their top holdings, according to Morningstar, FE and S&P Capital data.

The bad news, of course, is that its listed status means plenty of wealth managers will be holding the business within their own Aim portfolios. Those troubles extend to rival Boohoo; it's attempted to stem the read-across by stating it's trading in line with expectations, but shares are down 10 per cent nonetheless. 

Here there is some notable asset manager presence on the share register: Merian's UK equity team are big backers. And with Next, M&S and others also down this morning in response, few have been spared today's bad news.