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Asset Allocator

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Wealth managers lead the way as flows return; Buyers cling to a new portfolio ballast

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. 

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Springing into action

A welcome piece of good news to end the week for wealth managers: UK fund sales were on the up again in April for the first time in half a year. As the country took a brief Brexit breather, UK equities were back in favour, all-cap growth funds seeing their first net inflows for almost two years.

Take away the political risk and the attractions are obvious. As one bank noted this week, the free cashflow yield of the UK market is now above 7 per cent, 150 basis points higher than any other main market. Unsurprisingly, however, there’s little sign of interest from overseas investors just yet.

April's data suggests it's a little different domestically. And, at a time when the wider retail investment market started looking again at UK shares, the average DFM became a little more confident, too. Overall fund sales returned to positive territory for the first time since last September; discretionaries’ fund purchases made a net positive contribution for the first time since August.

But there was still a note of caution lurking behind this rosier outlook - even prior to the tribulations of May’s markets and June’s suspension jitters

Fund sales were helped into the black by another surge in fixed income product sales, specifically for strategic bond funds. And while equity fund sales did rebound, former go-to areas like North America and Japan nonetheless saw redemptions spike. It was global strategies, not the UK, that did most of the compensating - the former category taking in a record £934m on the month.

That’s a reflection of the same trend we identified back in April. Discretionaries proved themselves increasingly content to outsource allocation decisions to strategic bond managers and global equity strategies in March. A month later and the rest of the retail investment industry appears to have followed suit. 


Worries about global growth may be on the increase, but no one’s told listed infrastructure funds yet. Advocates will say underlying companies’ long-term goals have little truck with short-term anxieties. And there’s certainly something to be said for the resilience of these strategies over the past few months.

Wealth managers, not unreasonably, have often viewed infrastructure through the prism of investment trusts buying physical assets. The diversification benefits are obvious, and the closed-ended structure ensures no liquidity mismatch. 

Most buyers will have been thoroughly satisfied with those investments and the returns they’ve produced, though as we noted the other week, there are now signs of profit taking. The impact of a potential Labour government has also recently started to weigh on share prices again, too.

By contrast, DFM interest in funds that buy infrastructure securities is still ticking higher, according to our fund selection database. Performance is a large part of that: the asset class isn’t quite all things to all people, but infrastructure shares have flourished in most market conditions over the past year. 

These stocks held up far better than other sectors in the fourth quarter of 2018 - as you may expect from a traditionally defensive part of the market. And global infrastructure funds didn’t do badly during the early-2019 rally, either. Most were within a few percentage points of the MSCI World’s own performance over the first four months of the year.

The main risk here is that this performance makes these strategies more vulnerable on the way down. As it stands, there’s little sign that they’re shedding their defensive strengths. And at a time when allocation calls are tougher than ever, a reliable ballast is worth its weight in any number of different metals.


With the trade war noise rising, it's clear that the return of risk-off sentiment has spurred on the recent rally in government bond markets. But those expecting the added support of rate cuts should note they aren't a done deal.

The implied probability of not one but three rate cuts from the Fed rose by 10 percentage points, to a remarkable 63 per cent, this week. Understandably, both UBS and Goldman Sachs have warned that markets are overpricing the likelihood of cuts. As Goldman notes, investors could be “too hopeful” about rate reductions this year.

As the FT’s Katie Martin points out, similar doubts have emerged in Europe. Mario Draghi’s latest pronouncement yesterday proved disappointing for those expecting a commitment to action. The conclusion is that the data simply isn't bad enough yet - and central banks will require more than a dip in sentiment to load up the big bazookas again.

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