Picking favourites

Wealth managers who spied reasons for optimism at the end of 2018 will feel vindicated by a buoyant January. But the catch-all nature of last month’s rally does little to clear up the mystery of what might work for portfolios in the rest of 2019.

We’ve already read the runes when it comes to the thoughts of DFMs and the analyst community, but there’s another group to consider when it comes to spotting a consensus: fund managers.

Natixis Investment Managers has done exactly that, pulling together a variety of fund firm outlooks for the year ahead. Its findings are below:

Compare this data to the same managers' positioning in late 2017, as Natixis does, and it's no shock that providers were more downbeat at the end of 2018 than the beginning. Managers are less bullish on Japan, emerging market debt, Europe and even EM equities. Many noted better value in the last two cases, but still steered clear - the research attributes this to burnt fingers from times gone by.

But caution comes with its own risks. Exclude European government debt (not shown in the chart) and US high yield was the asset class on which the most fund managers were bearish. Yet junk bonds have again surprised the doubters in the past few weeks.

It's hard to blame strategists for not being able to call short-term price moves - but there is one area where providers look more negligent. The research suggests they aren't thinking carefully enough about how fund selectors allocate assets. None of the 20+ outlooks talked about hedging costs, despite the growing impact that rate differentials are having on returns. 

As Natixis notes, “asset allocation for a dollar-based investor should look different from a euro-based investor”. A one-size-fits-all approach to a global client base may be the easiest answer for fund firms, but it tempers their forecasts' value for UK (and other) wealth managers.

It's not all gravy

Baillie Gifford managers are rapidly making a name for themselves in the eccentric comments department. First the farmers, now the gravy. European equity investor Tom Coutts argues the gravy train for asset managers has started to stutter. ‘Peak gravy’ (his words) is here, and fund groups are going to have to think harder about how they charge clients.

Mr Coutts suggests one solution: erasing memories of hedge funds’ two and twenty model via a new norm; “something closer to point-two-and-twenty”. The idea is for all funds to levy ultra-low fixed charges and supplement them with a sliding performance fee.

The problem, from DFMs’ perspective, is that not many are looking to change the way they pay for products. Innovation, for them, often translates into little more than added complexity.

The above suggestion is vaguely similar to the ‘fulcrum fee’ share classes introduced on a handful of Fidelity’s UK-based funds last year. True enough, that charging model attracted criticism for being overly complex - though lowering fixed fees to a starting point of 0.2 per cent, as Mr Coutts suggests, might have helped smooth over concerns.

If wealth managers do start coming under more pressure from clients to justify their fees, lower fixed costs may start to look much more attractive - particularly in years like 2018, when returns in the red would help minimise performance fee charges. For now, though, both providers and fund buyers are showing little willingness to change.

A footnote: there was other positive news for performance fees earlier this week - outside the retail investment world - in the form of the Treasury's plan to make the 0.75 per cent workplace pensions charge cap more flexible. 

The idea is to allow schemes to invest more easily in illiquid assets - via fund structures that often come with performance fees. There’s still some gravy to be had by those offering exposure to alternative assets. 

Property funds cash out

More indications this morning that all isn’t completely well for open-ended property funds: the FCA has asked providers for daily updates on liquidity after a spike in redemptions in December.

We’ve flagged the impact of those outflows several times in recent weeks, but there’s another point worth pondering. If withdrawals have, as the FT reports, already reached levels seen prior to the fund gatings in mid-2016, why have suspensions failed to materialise?

The answer appears to be because higher cash levels have made providers “better able to cope” with money heading out the door. Another example of the system working well, you might think. But this is the very practice on which the FCA sought to clamp down in a recent consultation paper. 

It thinks funds should concentrate on remaining fully invested and be ready to quickly suspend trading in the event of asset impairment. Needless to say, there are plenty who disagree with this stance. They’ll be hoping December’s struggles will be enough to convince the watchdog to think again.