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Rose goes but rising sun shines for DFMs; UK funds shake off 'triple sell' albatross

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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Turning Japanese

Another significant manager move yesterday as Japan veteran Andrew Rose called time on a 40-year career. The Schroders manager is a big fish in a small pond: his funds account for 7 per cent of all DFM Japan picks in our database. But his departure is unlikely to affect the structural case for (or against) Japanese allocations.

Those allocations average out at 4.5 per cent for the typical Balanced portfolio. That's still pretty minimal, and as the cross-section of individual exposures below suggests, there isn't too much variation from the mean.

But while old habits may die hard for some fund selectors - Japanese equities are still pretty volatile, and Abenomics hasn't yet entirely wiped memories of past travails - the general view is more enthusiastic than the chart would suggest.

This is in large part a valuation story. Take PortfolioMetrix, which has a decent allocation to Japan in large part because of the relative value case.

That case is never static, of course. Hawksmoor is one firm with a particularly hefty allocation to the region, but its managers' heads have been turned by other countries more recently.

Japan has been offering value versus the US in particular, but also Europe, while we have shied away from Brexit risk. But the pendulum is swinging, [albeit] not towards the states, which still looks pricey to us. We still have managers who can find plenty of value in Japan, but the shake-out in Q4 has delivered some nice pockets of value elsewhere.

And yet, while managers are starting to think more carefully about the US, and turn more negative on Europe, it's still hard to find DFMs with a particularly negative view on Japan. Even some of those at the left hand side of the chart are more positive than you might think: Beaufort IM has just 2 per cent in the country's stocks in its Balanced portfolio, but it describes the asset class as its "most favoured" and has been adding exposure to other risk models in recent months.

Peak pessimism for the UK?

The Japanese market’s forward PE ratio for 2019 currently stands at 12.2 - as far as developed markets go, that’s rivalled only by the UK. 

Of course, UK equities aren't ranked anywhere near Japan in most global investors’ list of current opportunities. The B word continues to linger, after all. But there are signs that the valuation case is starting to attract more interest, and not only on the income front.

Our own analysis has shown that wealth managers are starting to warm to the valuations now on offer - or, at least, use recent falls as an opportunity to top up rather than let positions slide. 

Figures from the Investment Association also indicate an easing of selling activity. More specifically, they show the two best periods for UK growth fund flows over the past year were October and December - the most volatile months of 2018. 

That makes some kind of sense: having consistently sold down UK equities over the past couple of years, it's logical that investors take profits elsewhere when markets take a turn for the worse. UK outflows for these two months averaged £56m - well below the £322m average for the year as a whole.

This may look a thin straw to clutch, particularly prior to March 29: akin to when characters in US sitcom Arrested Development cheered the family business being upgraded from "triple sell" to "don't buy". But perhaps UK equities, too, have finally moved away from sell sell sell to something a little less disastrous.

Last man standing

We end the week with a u-turn of sorts. Last month we said the postponement of Aberdeen's sustainable trust launch might underline the old saw that sustainable investment interest withers away in tougher markets. It's only fair to point out some evidence to the contrary.

Data from Broadridge shows ESG fund flows across Europe fell by 15 per cent last year - not brilliant, but well below the 99 per cent drop suffered by the wider funds universe amid uncertain markets. 

Add to that shorter-term IA data showing that retail sales of ethical funds stood at £162m during a dark December - a year-on-year increase and the second highest monthly figure of the year - and a picture of resilient demand begins to form.

In that context, the trust may be more a victim of what Broadridge describes as “a big bandwagon of 'me too' fund launches” than anything more structural.

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