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Asset Allocator

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Wealth managers and the zombie fund problem; The global dividend trade-off

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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The squeezed middle

What can we learn from newly released UK fund flow data? Latest figures show precisely where the money went in November, a relatively serene month that now looks more like the eye of the storm than a return to normality.

The results arguably tell us more about the structural issues of the retail investment industry than they do about short-term asset allocation preferences. Because despite the brief respite on offer from markets over the period, investors' preferences were more or less the same as those observed during a rocky October.

Perennial favourites like Fundsmith Equity and Liontrust Special Situations remained near the top of the chart, though there's scant evidence of a rush to return to equities in general. And on the other side of the fence, the two biggest losers of recent months -  SLI Gars and M&G Optimal Income - continued to see assets hurtle towards the exit.

Notably Invesco Global Targeted Returns, which suffered the first outflows in its history at the start of the quarter, saw a marked acceleration in those redemptions - Morningstar estimates a net £460m outflow last month.

But none of this says as much about the state of the industry as the data on which funds haven't been bought or sold.

Like the headline fund flows, this too shows that investor preferences aren't changing much. The sight of the same few funds taking in (or losing) money each month hides a vast underbelly of unloved or just unrecognised assets that tend to sit dormant for most of their lives.

Of the 2,300 UK-domiciled open-ended products available (excluding fund of funds), monthly inflows or outflows amount to little more than a rounding error for fully 75 per cent of said offerings. These aren't just old funds - plenty are new or well-known offerings, and some may even be top performers. But they've been living a zombie-like existence for some time now.

And if even the sight of market volatility isn't enough to spark interest in these offerings, the old adage about the first three years of a fund's life being crucial is now more relevant than ever. Fail to turn heads in that period, and the chances of ever attracting interest - from DFMs or others - is becoming ever smaller.

Global income funds: dividend drag

We've spent plenty of time over the past few weeks talking about wealth managers' continued love affair with equity income strategies, as well as their rather more cautious attitudes towards global equity funds.

The obvious intersection of these two trends is in the shape of global equity income funds - and our MPS tracker suggests that the income desire wins out over the global reticence. As we’ve also noted in the past, Artemis Global Income is the single most popular global equity product in wealth firms' MPS portfolios, trumping even Terry Smith on that front.

Other popular global income names are more or less as you'd expect, with Newton, M&G and Fidelity leading the way.

But there’s a catch, in the shape of allocations to the US. Most these funds are still benchmarked against indices that have 40 to 50 per cent in North America. The lowly yields on offer there mean sacrifices often have to be made for those who want to back the world's biggest equity market.

The chart below outlines how this correlation holds up fairly well. The y axis shows the stated yield for DFMs' top global income picks, and the x axis their percentage exposure to US equities.

It's a rough science, and stock picking can clearly help mitigate or exacerbate the trend. And true enough the issue's less apparent for Artemis Global Income, which has 43 per cent in the US but yields a healthy enough 3.2 per cent. Focusing on unloved stocks does have its benefits from an income perspective: those eager for a value turnaround might think that one more reason to give the style another go in 2019. 

Signing off

The Fed has agreed on its now traditional December hike, but Jerome Powell sticking to the script wasn't exactly the Christmas present everyone wanted: the S&P 500 is now down almost 10 per cent on the month, Brent crude has fallen 8 per cent this week alone, and the Topix is in a bear market.

The good news is the year's almost over - so we're now taking a break ourselves until early January. We hope you've enjoyed the first few weeks of Asset Allocator: there's plenty more to come in 2019, and lots more data on DFMs' asset allocation habits courtesy of our proprietary database.

If you're new to the newsletter and want to look back over our recent editions, a full archive can be found here.

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All that remains is for us to wish all readers a Merry Christmas and happy holiday season. We'll see you in the new year.

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