The long/short latest

Things were looking pretty bleak for investors when we last checked in on long/short funds’ positioning. The data has since suggested these strategies fared pretty well amid the chaos of late-2018, but there have been more hard decisions to make this year. 

Given their flexibility, such funds may prove a better guide than most to what asset managers really think. So as wealth firms ponder their next moves, we’ve examined long/short funds’ latest portfolio shifts to see how they’ve responded to recent trials.

The chart below lists DFMs’ favourite strategies in the space, as judged by our fund selection database, according to how net exposures changed between early November and the end of March.

In sum, it’s a mixed bag. In the UK, the balance is tilted in favour of funds lowering their net exposure, but elsewhere there’s more of a spread. Some discretionaries may be surprised to see exposures increase after a quarter of market rises, but it’s often about the journey more than the destination.

The biggest change, for instance, has been at Polar UK Absolute Equity, and here the chart doesn’t tell the whole story. The fund’s net exposure has risen from 30.5 per cent to 55.8 per cent, but it was first pared back significantly before jumping again to the current level.

Polar also stands out for a different reason: while net exposure has increased, gross exposure has been reduced markedly. Only two other funds in our sample have done the same - if there is a pattern to have emerged over the past five months, it’s managers dialling up both their long and their short exposures.

At an index level, the rapid descent seen last October and December has been replaced by a pretty smooth rise since January. But lately there have been signs that stock dispersion is increasing again - our research suggests long/short managers feel we're approaching a fertile hunting ground for both long and short opportunities.

Around the world in allocations 

Despite an overwhelmingly UK-centric client base, DFMs aren’t exactly inward-looking when it comes to asset allocation. Yet one thing wealth firms don’t see much of is how their peers across the world tend to invest.

Natixis's latest global survey of professional fund buyers shows us how others were allocating at the start of 2019, and the calls they expected to make as the year progressed.

A look at allocations shows that, once again, UK DFMs have a punchier approach than other professional investors - or a greater fondness for equities and aversion to bonds, at least. 

The average global fund buyer had 43 per cent in equities and 32 per cent in fixed income at the end of last year. That compares with averages of around 55 per cent in stocks and 24 per cent in bonds from the average Balanced portfolio in our own database at the end of March.

That said, those surveyed by Natixis had many similar thoughts to the UK crowd: uncomfortable support for the US market, a liking for EM, and renewed faith in sovereign bonds after their positive showing in Q4.

One difference is global buyers seem cheerier on European stocks, the survey showing an even split between those upping, reducing or maintaining exposure. In contrast, cutting allocations has been the consensus choice among UK discretionaries. 

But the timing of the research means some views will certainly have shifted. It’s unlikely, for example, that 80 per cent of global buyers are still worried about interest rate rises. Despite that fear, the survey found few were planning to materially change asset allocations in the year ahead. A u-turn on rates could yet mean a similar change of course for investment strategy.

Coupling up

Another week, another piece of wealth management M&A. While deals have continued across all parts of the investment chain in 2019, it feels like this is discretionaries' moment in the spotlight. Sanlam's deal for Thesis comes soon after Canaccord's acquisition of Thomas Miller, and there are more rumblings of imminent consolidation elsewhere in the sector, too.

As ever, there are two divergent conclusions. Neither will come as a surprise to DFMs, but recent weeks will have concentrated minds.

The first is that scale is becoming more important, particularly as normal avenues of client growth close up. And the second concerns what this scale does to asset allocation and fund selection.

We're not at the stage yet where M&A is transformative enough to mean a rejig of fund buying practices: the addition of Thesis client assets is unlikely to block Sanlam's team from investing in any of its current strategies. But it will mean ultimately mean one fewer buy list out there. Homogenisation is on the rise - but so too, therefore, are the opportunities for those who opt to do something different.