A February thaw

From fund managers going defensive to skittish movement in the retail investment space, there’s little sign of anyone getting carried away by 2019's market recovery just yet. And wealth firms look unlikely to buck this trend any time soon, given their recent wait-and-see approach.

But it’s not all a story of fence-sitting: for those looking beyond the headline figures, there are hints of a breakout in different directions. Newly-released fund flow data for February gives us an idea of how thinking has started to change.

For starters, there's the unusual sight of not one but two EM equity funds in the top five best-sellers of the month. That's another sign of belief in the EM bull case, though the fact it was passives taking in this money suggests investors are only placing tactical bets for now.

Other beliefs look more deeply felt. Also notable was the rise up the ranks of several UK equity managers - not just the stalwarts of recent times, but also those who've been out of favour for a good while. Names like value diehard Alastair Mundy, in particular, stand out on this front. Mid-cap strategies like Merian UK Mid Cap also had a decent month, flows-wise. All this is a sign that, after months of back and forth over the merit of holding domestic stocks, valuations have started to win some over.

In contrast, the news looks decidedly mixed for UK physical property funds, another recent pinch point for fund selectors. M&G’s Property Portfolio saw an estimated £200m exit on a net basis, but Columbia Threadneedle's offering - which shifted its pricing on the back of outflows last year - returned to inflow territory.

And finally, investors continue to call time on some erstwhile popular names, from M&G Optimal Income to SLI Gars and the Aviva Aims funds. But it's not all bad for the absolute return poster boys: Invesco Global Targeted Returns is back to (modest) inflows after a recent sell-off. 

Not so fast

Those who have topped up EM exposures on a tactical basis might soon be reconsidering their choices, according to certain analysts - who point to both macro and micro reasons for caution in the coming months.

Capital Economics is one that believes the rally is all but over already. Its analysts point to a “stalling” in emerging market equity performance in recent weeks, and think this will translate into a full-blown reverse as the year continues.

The case is based on the belief that global growth is slowing; the analysts suspect that even a resolution to the trade war will not be enough to shelter export-focused markets such as Taiwan and Korea. They think EM credit spreads will also widen as a result.

And while wealth managers have been adding to the region - at the margin, at least - the recent stutter is evident from last month’s equity index performance: the MSCI EM Index rose by 0.2 per cent in dollar terms last month, compared with a 3.1 per cent rise for the MSCI World.

Even Franklin Templeton, typically a bull on the developing world, has its doubts. “Earnings need to improve” for the current rally to be sustainable, Temit managers Chetan Sehgal and Andrew Ness said this week.

Countering this caution is a market environment that still looks relatively benign, trade war aside. The Fed last night indicated that it would cease its balance sheet reduction plan entirely as of September, and that rates would remain on hold all year. That suggests little reason for the dollar to strengthen materially in the near future. Unless, of course, a global slowdown takes hold more forcefully. At that point, all bets would be be off once again.

Thumbs up

A piece of good news for DFMs to end. The FCA’s recent review of asset managers’ cost disclosures saw it criticise fund firms for “generally [not disclosing] all associated costs and charges” to investors, and for a lack of clarity and consistency. 

It’s a finding that could have been stated at any stage over the past decade - the arrivaI of Mifid II was supposed to have changed all that, but in many ways it’s made things more complicated. Fund firms are now presenting different costs in different ways across different documents - and the FCA’s not convinced they’re not doing this on purpose.

But the findings also make brief reference to a similar piece of work the regulator did on platforms and DFMs. This review has garnered less attention, possibly because it’s less dramatic. Failings were identified: the watchdog said the industry had been slow to get its house in order. But the tone is generally more positive than the equivalent look at asset managers. 

Crucially, the FCA said it was clear most firms “were trying to comply with the rules”. That this phrase stands out is pretty damning for behaviours elsewhere. It also indicates some goodwill towards DFMs that may prove necessary as other parts of the wealth world are scrutinised more closely in the coming months.