Risks and rewards

Equity long/short funds have been coming up trumps for wealth managers lately – those with shorter-term time horizons, at least. That’s no mean feat: the market swings of recent months could easily have caught out both the net short and the net long.

Data from Goldman suggests long/short hedge funds in the US have done equally well. Their success has been bolstered by two particular decisions: increasing net long positions just ahead of the market bottom in December, and rotating away from defensives - to both cyclicals and familiar post-crisis winners like tech and consumer discretionary names. 

Significantly, this outperformance hasn't materialised for other investors. The 10 US stocks most underweighted by fund managers have outperformed the 10 most popular stocks by seven percentage points so far this year, according to Bank of America Merrill Lynch. 

Yet Goldman's figures suggest hedge funds' favourite positions - as of the end of February, at least - have reverted to relative outperformance after two years of "unusually weak" returns. And this at a time when concentration is at a record high: the average fund holds some 70 per cent of assets in its top 10 positions.

So hedge funds having the courage of their convictions has paid off for now, at least.

By contrast, some think the struggles of go-anywhere absolute return strategies can be put down to the opposite phenomenon.

Here's Chris Teschmacher, a fund manager in LGIM’s multi-asset team: 

Reckless prudence is something we have seen in our peer group. It’s easy to see a risk on the horizon, whether it’s Trump or China or something else. It’s this idea that we are always running scared. It’s very satisfying to take risk off the table. [You see that with] these funds targeting cash plus 5 or 6 per cent and low volatility.

Discretionaries won't expect these funds to perform in the exact same way as their long/short positions, of course. And some of the former grouping did indeed do relatively well amid the most extreme downturns of the fourth quarter. But for the moment, it's equity-focused strategies that are enjoying a moment in the sun.

A look at the other side

Hedge funds may be in a positive mood, but bullishness remains a rare commodity on the whole. That can be seen everywhere from gauges of professional investor confidence to another set of underwhelming UK retail fund flow data released yesterday: a fifth consecutive bout of net outflows saw equity products suffer net redemptions to the tune of £446m, with even bond funds managing just a £77m inflow.

DFMs, once again, were among the most bearish groups, accounting for nearly £400m in net outflows. But it’s behaviour in another part of the market that might capture the attention of wealth firms.

While risk-focused asset classes have struggled, multi-asset funds have generally held up well enough. And in the last year these products have continued to gobble up assets. The Mixed Investment 40-85% Shares sector took in more than £3bn over the past 12 months. That compares with £2bn for the two lower risk groupings. It’s only the Flexible Investment sector that racked up an outflow, of £232m.

What does this tell DFMs? It’s a reminder that (some) money is still available at a time when investors feel unsure. But wealth firms face a fight for these assets.

The competition comes in different forms, ranging from funds of funds to multi asset strategies that invest directly in a variety of securities. For the latter, assets are relatively evenly split between fettered funds and those that buy from third parties, the IA’s stats show.

Vanguard’s LifeStrategy range looms large on this front, as we’ve discussed before, but other big names are also doing well in this space: the Cirilium range at Quilter, or Bambos Hambi’s MyFolio franchise. Both of these have the additional advantage of money coming in from adviser networks attached to their parent companies. Either way, it's clear the structural support for unitised multi-asset funds may have some discretionaries looking on enviously.

No need to be clear

As the end of the tax year approaches, clients will be growing more familiar with the detailed disclosure requirements mandated by Mifid II. Quarterly statements, while not as comprehensive as the annual figures produced at the start of the year, will at least show an uptick in performance given the relative serenity of the first three months of 2019. 

Whatever the market movements, there's a growing belief that DFMs must embrace the new era of transparency. If nothing else, many of their clients are now financial advisers themselves - and therefore more likely to ask probing questions where necessary. 

A shame, then, that this age of greater disclosure doesn't seem to be extending to other parts of the investment industry. The government published its response to the pensions dashboard consultation yesterday, giving pension schemes up to four years to provide data to consumers via the new online services. 

That seems more than generous - particularly as the response made no mention of including pension charges in the dashboard. Whatever the improvements elsewhere in the industry, it looks like consumers will stay in the dark on retirement savings for some time to come.