Asset AllocatorApr 24 2019

DFMs start to outsource the big Q2 investment calls; Facing up to a flowless recovery

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.

April allocations

Nearly four months into the latest rising market, some investors may well regret sitting on the sidelines after the events of late 2018. For DFMs it’s a different story: all will be invested, just to different extents. Which leads to the question: after months of upward movement, are they taking profits or running winners further still?

Latest asset allocation data from our MPS tracker suggests that wealth managers are doing a bit of the former. Of those in our database who reshuffle portfolios on a monthly basis, the average DFM reduced their Balanced US equity weighting to just under 16 per cent at the start of April, as the chart outlines. 

It's not just the leading lights that are being pared back: wealth firms have also continued to lighten up on areas such as Europe and Japan. But they aren’t ducking out of risk assets altogether.

In equities, the most notable area where allocations increased in March was global funds. It suggests that, with little clear consensus to grab onto, managers are instead broadening out their equity positions.

A similar story played out in fixed income: strategic bond positions rose, while high yield and EMD weightings fell. In times of uncertainty, leaving the asset allocation to a specialist fund manager can feel more like a sensible hedge than a dereliction of duty.

Be that as it may, there are still a few signs that caution is waning. A fifth of those in our sample upped their cash weighting, but aggregate cash positions fell for the first time this year. And as it stands, there's little sign that will prove an unwise decision.

Flowless performance

If DFMs are still a little hazy about the outlook for risk assets, the picture painted by fund flows in general is more straightforward. And unfortunately for investors, that image is rather more negative. 

Estimates from Morningstar underline that the end of the 2018/19 tax year was an uninspiring event for the vast majority of fund selectors. Changes to the way in which retail investors buy funds - nowadays the typical client is far more likely to be focused on their pension than any other tax wrapper - mean ‘Isa season’ has long since petered out. But this year there was more going on than that.

March data suggests that just two active funds enjoyed more than £100m in flows - Lindsell Train UK Equity and Baillie Gifford Multi-Asset Growth. That’s the lowest number for many a month. And for once passives didn’t fare much better, with just four products hitting the same level.

Indeed, only 25 active funds have taken in £100m all year - a sure sign, were it needed, of the stasis affecting many asset managers at the moment.

On the outflow side, fund firms’ continued moves to carve out European investor assets from UK-domiciled portfolios can make it hard to glean accurate information at the moment. But the flight from European equities is apparent even when taking that into account: this remains a rare asset allocation decision of which most DFMs are pretty confident.

Jupiter’s Alexander Darwall has the added complication of issues with his top holding Wirecard. But that didn’t seem to have much of an impact on wealth managers’ views in March, given outflows from the strategy were negligible. Numis reported yesterday that those redemptions have ticked up in April on the news that the manager is to step back, but it’s still early days for this trend. 

Similarly, while Neil Woodford attracted some ire for his latest unquoted investments move, estimated outflows of £158m from Woodford Equity Income aren’t much of a spike relative to recent months. Most discretionaries appear to have already made up their mind on the manager.

Private concerns

Earlier this month we mentioned the growing interest in private asset investing: not just the unquoted stock positions in which mainstream fund firms are dabbling, but also private equity funds themselves. 

At the same time, plenty of investors remain wary of the risks inherent in an illiquid asset class, not least one in which leverage is rising rapidly and opportunities may be drying up. The bubble is "bound to burst", as the FT put it the other week.

So with that in mind it's not surprising that moves are afoot to bring a quantitative investment approach to the PE sector, in the process lowering barriers to entry like liquidity risk and hefty fees. Whether the stated solution - a basket of PE-like listed small-caps - can accurately replicate the qualities asset class is another matter. But more attempts of this ilk are likely to emerge before the bubble pops.