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Asset Allocator

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Are Asia equity funds really delivering? Two-speed rally leaves wealth managers behind

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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Asia, up close

Emerging markets' return to favour has been one big theme of the year so far. DFMs' preference for Asia ex-Japan strategies over broader EM funds has played out well in this regard: Chinese and latterly Indian stock markets have driven much of this resurgence.

With India cutting rates again overnight and China seemingly embarking on a new round of stimulus, policymakers are clearly trying to lay the foundations for a further rally in the months ahead. 

Whether wealth managers' favourites can capitalise is another matter. To gauge current positioning, our chart breaks out average allocations for DFMs’ 10 favourite active Asia funds, as compared with the MSCI AC Asia ex-Japan benchmark.

The most popular Asia fund picks tend to resemble one another, and the benchmark, quite closely. This also applies on a stock level: the number whose top ten holdings feature three or four of the biggest stocks in the index - Alibaba, Samsung, Tencent, AIA and Taiwan Semiconductor - is notable.

Given the runaway performance of many of these companies, underweighting them is easier said than done. Still, of the major Asia funds, it's really only Stewart Investors AP Leaders and Hermes Asia ex-Japan whose largest positions look materially different from peers'.

On a regional basis, the index's large China weighting proves too much for most the big funds to match - but most still keep a sizeable chunk of their portfolios in the country. 

India, however, is one of the only regions that DFM favourites are overweight. That suggests they were well placed to capitalise on the recent rally, as does the presence of financial conglomerate HDFC among these funds' biggest active positions.

India aside, the verdict’s out on whether funds' decision not to stray too far from their benchmarks has helped in the shorter term. Most have kept up with the recent rally but underperformed in Q4. That suggests a little more independent thinking may be the order of the day in future.

The double-edged sword

A final note on how the first quarter's market moves played out from wealth managers' perspective. Two sectors sum up the division that's again started to emerge behind the positive headlines. 

First is tech: fund managers may no longer consider it the most crowded trade, but the Q1 rally has put the Nasdaq within sight of a new record high. A glance at the IPO of Uber rival Lyft suggests there's still plenty of froth in the market, even if the stock has struggled to sustain its opening-day performance. 

That's been a boon for wealth managers, the vast majority of whom maintained their tech-focused holdings amid the sell-off last year. Our database shows no sign that the likes of Polar Capital Global Tech or even Baillie Gifford American have been dumped in response to that volatility spike.

By contrast, a quarter defined by downgrades to interest rate expectations has taken its toll on financial stocks. We mentioned last month that investors have returned to their old preference for quality companies. The reverse of that is that financials, unlike many other sectors, are still far from reclaiming the levels at which they traded in mid-2018.

Not much help for portfolios there - but wealth firms' boardrooms may be viewing things slightly differently. Because it's not just the big conglomerates whose share prices have failed to recover: the trend extends all the way down to financial adviser firms. 

Hence Quilter's offer for Lighthouse Group yesterday, which represented a 25 per cent premium to its recent share price - but was still more than 40 per cent below where the shares traded last August. As volatility subsides, listed asset and wealth management firms may find themselves more vulnerable to takeover than ever.

Under pressure

The price of acquisitions may be falling, but few discretionary managers will need reminding that the cost of doing business is rising across the board. Mifid II and structural changes throughout the industry are starting to turn the screw, and those pressures are making themselves felt in all manner of places.

We mentioned earlier this week that "self-indexing" may be one way for fund firms to circumvent the growing cost of tracking traditional benchmarks. Today the FT points out it's not just these licensing costs that are increasing: stock exchanges are charging more and more for "the basic ingredient to every trade: market data". 

It's one more reason why the M&A boom isn't likely to slow down any time soon - and why the big are likely to get bigger, and smaller rivals swallowed up.

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