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Fund buyers' alternative entry points; A struggle for high-hanging fruit

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Entry points

Say the words “taking profits” and investors could be forgiven for thinking about the mainstream asset classes. This year’s equity rises and the latest bond rally are decent reasons to lock in some gains. But it’s moves in less conventional asset classes that have prompted some fund buyers to notch up a win while they can.

Premier’s multi-asset team recently exited positions in several alternative investment trusts, from Sequoia Economic Infrastructure Income to GCP Asset Backed Income and Primary Healthcare Properties. The firm’s Ian Rees says the decisions were based on the strong share price performance seen at the turn of the year. 

As is often the case when a manager sells into strength, he adds that the team’s conviction in the funds (and underlying assets) hasn’t wavered. But there’s more to it than that.

Given the relatively stability at the moment, some other alternative trusts are now looking to raise funds. And because of the substantial premiums on which their recently-exited holdings trade, Mr Rees sees this as a chance to buy into similar assets at more attractive levels:

There were vehicles that raised funds in Q4 but were frustrated by volatility. Now that markets are calmer, we are seeing a lot of these revisit fundraising.

This could ultimately mean returning to some of the same names. Sequoia recently announced it would draw down some debt to drive further growth. As a result, Mr Rees thinks it may look to raise more money later this year - and Premier wouldn’t be averse to buying back in. 

It’s an approach that may be uncomfortable for DFMs conscious of portfolio churn. But after a rough Q4, selling winners may be a way to give portfolios a boost.

Tilting away

The case for value investing now looks as compelling as it ever has done - if only it would finally play out. Life remains difficult for the all-out value enthusiasts – and many DFMs are more likely to dip a toe into contrarian waters rather than plunging in.

But while the performance gap between growth and value names is at a record high, there are other factors to consider. Jupiter’s Merlin fund of funds team says there are reasons to think twice before tilting heavily to value this late in the cycle.

Here’s fund manager David Lewis on the latest value/growth dynamics:

If you are buying value now, it’s more cyclical in the US than it has ever been before. That’s because of the debt the companies have on board - it’s higher beta. Some of the higher quality growth companies have stronger balance sheets [than in the past] – there’s lower beta to quality growth in the US than to value at the moment.

Mr Lewis adds that, if economies are closer to a recession than before, added cyclicality would be unwelcome in portfolios. Good reason, then, to exercise some caution.

But as ever, there are opportunities for steely investors. Merlin’s John Chatfeild-Roberts notes that the cheapest market at the moment is Japan, “by a significant margin”.  A Morant Wright fund backed by the team, which specialises in Japanese small caps, holds companies on an average price to book of 0.8.

So even when beaten-up UK shares are discounted, there’s plenty on offer for the contrarian-minded. But wealth managers might want to take stock before going all in.

Hang back

Professional investors might be spotting value in certain markets, but there’s arguably less low-hanging fruit left when it comes to another business consideration: cutting their own costs. And even where there are exceptions, it’s unlikely that reducing overheads will be simple.

Take index providers, who still charge hefty fees. As we’ve noted before, fund firms may at least be able to save money on this front by self-indexing.

As the FT writes today, the increasing number of companies doing this could well lead a fightback against the current expense involved. Other factors, such as increased competition in the index space, might also make life easier.

But self-indexing is far from a panacea, because it brings its own problems. For one, this activity attracts closer regulatory scrutiny. But it also comes with a barrier well known to those in the passives universe: it’s difficult to do without major scale.

Much like the uptake of segregated mandates, it’s a way that investment firms can take greater control of their fate and keep a lid on their own costs. But in both cases, there’s no free lunch here.

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