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Asset Allocator

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The hunt for yield goes awol - but fund buyers find some unexpected winners

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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Income outcomes

There’s a simple and familiar theme linking the early winners of 2019, according to Baml: the hunt for yield. Flows into corporate bonds, EMD and Reits, coupled with a record level of interest in mortgage-backed securities, suggest investors think interest rates have peaked again for now. 

That’s the global, or perhaps US-centric, viewpoint. Have wealth managers been doing something similar in the UK? To be frank, not so much. Fund flow data for January indicates little yield-chasing behaviour, and in some areas quite the opposite.

One reason might be that UK investors are already ahead of the game. The search for yield has been a familiar theme in investment markets for years now, and there’s a limit to how far such trends can go - even if Baml thinks credit conditions have “reinvigorated” the impulse of late. Domestically, there are idiosyncratic factors that long since strengthened investors’ positioning on this front - chief among them the needs of a new breed of retirement client.

So look at UK fund flow estimates from Morningstar, and it’s obvious that the outflows of November and December weren’t followed by a revival in interest last month. Many of the same trends persisted: absolute return funds suffered, and UK property funds saw further outflows after December’s jitters

And dedicated income strategies saw money exit, too: plenty of corporate bonds and global equity income funds struggled to retain interest. Baillie Gifford’s high-yield bond fund was among the biggest winners with £150m in new money, but this was very much an isolated case.

Even the sight of more attractive yields on UK equities has done little to stimulate interest: only seven UK equity income funds took in more than £10m last month. This may correspond a little more closely with Baml’s thoughts. Despite the race for yield (and the January rally) the bank concedes there’s still a “buyers’ strike” when it comes to equities. This is the relevant conclusion to draw from the data for UK allocators: few are yet convinced that the rebound is worth backing.

Japan jumps up

Some DFMs may find themselves reaching for yield entirely by accident: it’s not just UK stocks that have seen payout ratios increase markedly as a result of stock market falls.

One obvious example is Man GLG Japan CoreAlpha, which remains the most popular Japan fund in model portfolios, according to our MPS tracker. The fund’s yield rose from 2.6 per cent at the start of last year to a record 3.6 per cent by this January, not least because the portfolio was in the red to the tune of almost 10 per cent last year. 

We’ve noted some of the scepticism over the Japan dividend story before now, but this is the kind of figure that could convert selectors to the cause - even if they aren’t buying the fund for that reason.

It comes at an (in)auspicious moment for Japan. Tthis month marks two decades of rock-bottom interest rates, and other economic signals are still mixed at best. Wage growth is rising, but overall inflation levels remain muted and there’s another consumption tax headwind on the horizon

On the corporate front, it’s not dividends but buybacks that are booming. Goldman estimates that buybacks have jumped by 64 per cent year on year. There’s a uneasy aspect to this - the FT says Japanese companies are “both deleveraging and short of ideas on how to use the funds that are building up” - but the sea change in behaviour is surely being welcomed by investors.

Returning to Man GLG, and there’s one other change that’s worth considering. The CoreAlpha portfolio now contains just 41 stocks, an all-time low, with a record 53 per cent held in its top 10. That indicates a confidence in the stocks they’re backing, but also suggests that any market shift from growth to value - which the team thinks began some two-and-a-half years ago - will be far from a one-way street. No stock is guaranteed to be a winner, even at current valuation levels. As ever, there’s no easy answer to the puzzle of Japanese equities.

Board harmony 

Will the FCA’s demand for asset managers to add non-executive directors to the boards of their funds change much? It’s been an open question ever since the regulator overhauled its rules a year ago. 

The implementation deadline is now fast approaching: fund boards must ensure at least 25 per cent of their directors are independent as of this September. The proof will be in the pudding, but it looks like there’s still some conflict in the minds of asset managers.

On the one hand, they’re affirming this won’t be a box-ticking exercise. On the other, industry figures are counselling against too much independence. “There is a real risk of non-executive directors getting antagonistic” is one quote found in a new Ignites Europe article on the subject. Guarding against that outcome would probably mean a quick route to an easy consensus.

The new rules also mean fund boards will have to produce an annual report examining how a given strategy has produced value for investors. But if investors were hoping for real insight, the early signs are these changes may prove little more than a recipe for disappointment.

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