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Asset Allocator

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DFM exit strategies under scrutiny, Optimal Income's mirror image, and an end to R&R

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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Exit wounds

DFMs might have a knack for picking winning funds, but timing an exit is just as important. And the reasoning behind a sale can tell us plenty about an investment manager’s approach: do they only tend to drop funds when underperformance forces a change?

To answer that question, we’ve analysed the past nine months of fund sale activity within our database, and cross-referenced it against performance data. The chart below shows how funds did in the year prior to being sold.

The fourth quartile figures show that many discretionaries are still dropping holdings for less than auspicious performance: getting rid of a fund because it's lagged its peers is still a popular rationale. 

But what’s also clear is it’s not just the stragglers being ejected from portfolios: just under half of funds sold had beaten their peer group average in the year beforehand - and a third were in the top quartile. Condense the performance timescale to six months, rather than a year, and the chart above would look almost exactly the same.

So a decent chunk of wealth managers’ selling activity is because they've opted to no longer run winners - either because they're changing allocation decisions or simply taking profits on a top performer.

If it’s the latter, this could be yet another sign of late-cycle thinking: those suspecting a shift in the market regime might be banking their gains before it’s too late, or repositioning accordingly. 

Overall, discretionaries will probably feel the findings put their practices in a favourable light. But let’s not forget the recent research about fund managers’ own disposal practices: worse than random, according to one academic study. As asset prices remain relatively buoyant, DFMs might want to ponder whether they’re still selling their best performers too soon.

An unusual bond

The arrival of bonus season means Richard Woolnough’s pay is back in the headlines. Recent outflows from M&G Optimal Income are unlikely to prevent the manager from banking another sizeable cheque from his employers this year. But allocators might be more interested in the way his fund has dovetailed with its biggest rival, Jupiter Strategic Bond, in the recent past.

The country’s two largest strategic bond strategies have had an unusual relationship of late when it comes to fund flows. This is a tale of European investors, which means it's Jupiter’s offshore vehicle, Dynamic Bond, that’s of particular interest today.

Plot the redemptions from Optimal Income against those for Dynamic Bond and the either/or trend is obvious: when one’s out of favour, attitudes to the other are starting to soften - and vice versa.

In 2015/16, when Optimal saw large amounts of money exit, Dynamic was taking in billions on the continent. That relationship reversed in 2017/18, but this year, just as attitudes to Dynamic Bond are improving, Optimal Income has seen money yanked away again.

Both funds have proven victims of their own success: shifts in sentiment mean money can exit just as quickly as it once arrived, despite neither strategy’s performance being particularly bad at any point. The stereotype of flighty European investors does have some application here, though that's to do with distribution processes on the continent rather than individual character traits.

And the way Mr Woolnough and Ariel Bezalel view the world also goes some way to explaining their funds’ inverse relationship. M&G tells the FT that Optimal Income is positioned for “global economic recovery”; Mr Bezalel has been preparing for something much more gloomy.

Such stark positioning is usually welcomed by fund selectors, but buyers used to blending different strategies should be wary of this pair simply cancelling each other out.

No more rest and relaxation

The opening hours of Monday haven’t done much to reassure investors after Friday’s US jobs miss. German industrial production fell unexpectedly in January, and a couple of nasty datapoints emerged overnight in Japan and Korea, too. Not what the global economy ordered at a time when the economic surprise index is already in the red.

As ever, there are two ways to view this: either the trade war and economic slowdown are having a serious impact on those manufacturing and export numbers, or the figures are merely a short-term blip. The ECB's return to stimulus policies suggest it’s in the former camp, but investors themselves were content to see markets drift lower last week rather than renew the behaviours seen at the end of last year. 

European indices have started Monday on a more positive footing, but US data out later this week could provide a few more clues about whether 2019’s period of rest and relaxation is coming to a close - or whether the jitters will subside once again.

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