asset allocator header image

Asset Allocator

from Asset Allocator

Fund buyers' missing links; The closed shops attracting wealth firms' attention

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. 

Forwarded this email? Sign up here.

Drawing a blank

Consensus has it that there are more than enough funds of different shapes and sizes available to selectors. Even if you filter out the closet trackers, the zombie funds and the perennial underperformers, the pool of options is pretty big: our MPS tracker currently lists more than 1,000 funds held across DFMs' model portfolio ranges.

But sometimes even this level of choice isn't quite enough. Some wealth managers are still struggling to find suitable products in certain areas - and these areas aren't necessarily little-known asset classes.

The problem, notes Rory McPherson, head of investment strategy at Psigma, is particularly apparent in beaten-up asset classes that are now looking attractive again.

He says his firm has struggled to find offerings in areas such as natural resources, not least because many of the options of old were “wiped out” during the lean years.

The most obvious absence of available active funds tends to be within the areas that have performed most poorly, which are often the areas that [then] do best since they are the cheapest or most under-owned. Clear examples here would be European value, resources and commodities.

As a result, last year Psigma seeded the launch of a Lazard commodity fund as a way of rebuilding its resources exposure.

But not all active managers are as confident as they once were that there are gaps in the market to be filled. It's passive players that are increasingly stepping into this void. 

AJ Bell’s MPS team noted last month that the recent launch of US corporate bond and short-dated US Treasury ETFs have provided something a little different to its lower-risk portfolios. For all the talk of an oversaturated marketplace, discretionaries are still pretty open to the idea that new products - active or passive -  can offer something a little different.

Case closed

For wealth managers again thinking twice about physical property funds, investment trusts must have some renewed attractions right about now -  if they're compatible with firms' MPS preferences, that is.

As we've discussed before, plenty of DFMs are already using closed-ended property and infrastructure funds in their portfolios. The chart below, highlighting the most popular choices, shows discretionaries haven't been afraid to take advantage of the more idiosyncratic options available in the trust world.

In short, there are a few clear favourites, and a long tail of funds that have attracted a smattering of interest. 

The top pick, HICL, represents 7.5 per cent of all physical property and infrastructure selections in our database. It has some clear attractions, not least a yield of 4.8 per cent. But its healthy performance has also created a familiar problem for investment trust investors - its shares currently trade on a hefty premium to NAV of more than 9 per cent.

The next two names at the top of the chart also invest in infrastructure, with a focus on dividends and inflation-linked returns, though BBGI is much less exposed to projects in the UK than HICL and IPP. 

After that comes a wide range of options. It's notable that buyers have backed both the conventional AEW Reit and its long lease equivalent, while other specialist approaches such as GCP Student Living have enjoyed a reasonable level of take-up among DFMs. For any wealth firms looking to jump out of the open-ended space, there's still plenty to pick from.

At odds

“The stockmarket is not the economy” is a basic tenet of investing, and it’s certainly been borne out by the QE era: rising asset prices have proved a stark contrast to the Japanification of large swathes of the global economy.

Europe is one obvious example, and additional stimulus announced by the ECB last week suggests the age of easing has a while to go yet on the continent. But there is a sneaking suspicion fund managers have got carried away with this disconnect.

Quilter Cheviot surveyed 20 European equity managers at the start of the year, and its findings were revealing. Eight of those surveyed said a recession in the next 12-18 months was possible, but all were still positive on the prospects for their own portfolios.

Needless to say, few fund managers ever proclaim themselves outright bearish. But if a European downturn were to materialise at this stage in the global cycle, the odds are that far fewer than 20 out of 20 managers would come away unscathed. And in this case, it's not irrational exuberance but a tougher 2018 for European equities - which pushed valuations back down from the near-term peaks reached 12 months ago - that may have led to a little complacency setting in.

Get the story behind the stories
The daily newsletter for fund buyers