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Asset Allocator

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A short guide to fund buyers' alternative winners; Allocators' decade of false dawns

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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Divided times 

The search continues for answers to absolute return funds’ woes. Collective performance hasn’t been as bad as some claim - an average loss of 2.3 per cent in the final quarter of last year isn’t crisis territory - but struggling multi-asset strategies have left DFMs looking for answers.

By the same token, the sector’s problems aren’t solely confined to this cohort. Some allocators have been digging a little deeper in a bid to improve their fund selection odds.

One fund selector recently suggested to us that time horizons might have a role to play: those targeting a positive return over 12 months may prove more stable than those with 36-month timeframes. To examine that idea, we’ve ranked the performance of various different types of absolute return funds over the past year, as detailed below:

The results suggest time horizons aren’t much of a guide to performance. Yes, those with shorter-term targets have fared slightly better, but for the sector as a whole there's not a big gap between the two groups.

On top of that, the best performers of the past 12 months are drawn from a wide range of asset classes and investment styles. There’s space in the upper echelons for market neutral strategies, a handful of absolute return bond funds, and yes, even some multi-asset portfolios.

But the figures also emphasise one particular way to increase the odds of success (aside from good fund selection). Over the past year, one type of fund has stood out from the crowd: long/short equity portfolios with 12-month return targets. And this healthy performance has come despite levels of stock dispersion falling back over the past few months.

By contrast, those long/short funds that take a longer view have fared worst of all of late. It seems clear that tactical strategies' relative caution - or nimbleness - has helped them deliver the goods in recent months.

A decade of easy money

Today marks a full decade since the Bank of England cut interest rates to their record low of 0.5 per cent. To continue the theme above, from an investment standpoint it’s no surprise that absolute return has been the worst-performing sector in the era of cheap money.

But puzzles abound on the economic front. Not least the question of why loose policy still hasn't prompted material consumer price or wage growth.

This absence has been very much contrary to prevailing wisdom. Like the market’s ability to predict nine of the last five recessions, the QE years have brought repeated forecasts that rapid price growth is around the corner.

Those predictions have been muted in the last couple of years as the extent of the global deflationary pressures became apparent to all. Even now, sustained wage growth is tough to find. Average hourly earnings growth in the US hit a nine-year high last September, but the figure didn’t breach the 3 per cent mark.

Since then, the Fed has felt comfortable pausing its hiking cycle. And latest data doesn’t suggest it’s behind the curve: an analysis of 25,000 earning calls by JPMorgan has found “fewer S&P 500 companies are highlighting rising wages as a risk”.

Investors haven’t been alone in their misplaced expectations over the past decade. Central banks have been similarly culpable - and some don’t appear to have learned from their mistakes. Pictet senior economist Frederik Ducrozet notes that the ECB’s latest inflation projections are following a familiar trajectory.

One explanation may be that policymakers' over-generous estimates give them the required wiggle room to ease policy when price growth falls short.

And that theory, if correct, tells us much about where we are in 2019: central bankers are still thinking about how to stave off the next downturn rather than guard against the risks of excessive expansion. Not much of a cause for celebration, to say the least.

Two warnings

It’s been a rather grisly few days for the listed wealth management sector. First Walker Crips and now WH Ireland have warned on profits amid general investor nervousness and the looming prospect of Brexit. 

There was nothing mild about either warning: Walker Crips said full-year figures would be “much lower” than in the previous period, while WH Ireland said operating losses will likely be “substantially higher” in the six months to 31 March.

Both businesses are already in the middle of turnaround plans - WH Ireland in particular is attempting a root and branch overhaul after several years’ worth of struggles - but their travails can’t be entirely dismissed by rivals. Tough trading conditions are affecting all parties in the sector at the moment.

The usual adage in times like these is that the strong will survive and others may fall by the wayside. For now, many of the bigger players are still working to ambitious expansion plans: expectations will have to be hurriedly adjusted if the industry’s client base continues to head for the hills.

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