Asset AllocatorApr 8 2019

DFMs ponder shift out of top GEAR; Stage set for investors' best (and worst) year ever

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

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.

Shifting Gear

The stakes are always high for outperforming fund managers: success means more assets to manage, more holders to keep happy and often more responsibilities elsewhere, too. 

So it is for the team behind Merian Global Equity Absolute Return, which remains the most widely held fund in our DFM database. Lately Ian Heslop and co have been picking up extra mandates, from European large-cap offerings to Asian equity funds. They now oversee more than 10 funds across several different IA sectors, with assets approaching £28bn, according to FE.

Is it too much? Merian says the team's systematic process is "highly scaleable", meaning it has no concerns about the overall level of assets or number of portfolios managed. 

Fund selectors also appear sanguine. FundCalibre’s Darius McDermott, who holds the fund, says he’s “not directly concerned” on the resources front. But other questions remain. LGT Vestra’s Meena Lakshmanan, for one, worries about how quickly the global fund can adapt to changing markets: 

The size of GEAR was raised with the team last year, more in the context of how they would cope if factor trends reverse and can they be nimble at this AUM level. Merian recognise this issue, their quant model is built to be flexible so adapt to these reversals. However, this may not be enough if the AUM is fairly large.

One point of reassurance, as Mr McDermott points out, is that Merian has put the brakes on GEAR's asset growth. But there's also performance: GEAR has struggled in the past 12 months, shedding around 10 per cent. Merian says the team has been positioned for more volatile equity markets, but hasn't had exposure to popular safe-haven assets like dividend yield strategies.

These questions have likely played a role in some DFMs' decision to pare back allocations to the fund. But others are keeping the faith, not least because of its long-term track record and diversification benefits.

As Mr McDermott notes: We are a happy holder – we are not as happy as we were. But we are aware of the fund’s return profile – it can have lumpy returns.

Staying on track

Unafraid to jump the gun in the search for a good statistic, Bank of America Merrill Lynch notes that 2019 is on track to be the “best year ever” for risk asset returns. As of last week, global equities are on track for an annualised gain of 68 per cent (better than 1933), with commodities penciling in an 85 per cent return (better than 1973).

If only it were that simple. Baml itself suggests the moment of peak central bank liquidity may already have passed at the end of March. And the sense is that most wealth managers would be pretty happy if markets went nowhere for the rest of the year. Further rapid rises might only heighten nervousness: to take another all-too-soon datapoint, 2019 is on course to be the worst year ever when judged by retail fund sales.

Here too, things are more complicated than they first appear. A closer look at the latest fund flow statistics, which we touched upon on Friday, shows that tracker funds are holding up pretty well amid the gloom. 

Six consecutive months of retail fund outflows has seen £2.7bn worth of redemptions from active funds; over the same period, trackers (which are included in that total) have taken in £4.3bn.

So you can read the outflow data two ways: on the one hand, the prevailing sentiment is even worse than it first appears for active funds. On the other, a fair chunk of recent selling activity may have more to do with a structural reallocation to passives than a flight from investments in general.

Ultimately, selling decisions are simply easier to take at the moment: plenty of funds have either racked up long-term gains or taken a turn for worse in recent months (or both). Working out where to go next remains the challenge for DFMs.

Off trend

The past six months may have been defined by two basic market tendencies - risk off then risk on. But as we've seen, tracking these moves has been far from simple for trend-following strategies.

Today comes an indication that big-name fund managers themselves are all but admitting defeat on this front: hedge fund Renaissance Technologies cut back its use of futures-based strategies by almost two-thirds at the end of last year, according to the FT. 

The issue is not just one of timing the market. There's another structural problem that will look pretty familiar to DFMs: too many players trying to do the same thing at the same time. "Overcrowding" in the trend-following space has dampened the effectiveness of many tried and tested techniques. So Renaissance follows Winton in cutting back on its trend-based bets - leaving the sector facing an uncertain future.