asset allocator header image

Asset Allocator

from Asset Allocator

UK equity upstarts left behind; Funds chart a course through the Woodford shockwaves

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.

Old hands

Look at the UK retail fund universe and there’s now a neat dividing line: half of the 4,000 strategies available were launched more than a decade ago, half at some point during the past ten years. 

But that doesn’t mean the individuals in charge of those strategies are similarly split: the proportion of managers in charge of the same portfolio for a decade or more is much smaller. To take a pertinent datapoint, only three in 10 DFM fund manager favourites have run their portfolio since before the fall of Lehman Brothers.

That knowledge may ultimately come in useful when something other than a bull market reasserts itself. In the meantime, the cohort of experienced names continues to dwindle, as retirement comes calling or parent companies call time on their strategies.

Indeed, some figures suggest the more experienced managers are at greater risk of seeing their funds closed than their newer rivals. Three-year track records for veteran managers are typically worse than those achieved by newer faces.

This finding applies across European, US, Japanese and EM equities, according to our analysis of performance figures. In each case, managers at the helm for less than 10 years have outperformed those with more than a decade’s worth of experience, albeit only by a percentage point or two. That's not necessarily a positive. At this stage in the cycle, selectors might have a favourable view of veterans' relative caution.

In any case, UK equity funds are the one exception to this trend. Here the older stagers - those who have stuck with the same firm and same portfolio, at least - are ahead of their peers. Conveniently enough, the UK is also the region in which DFMs themselves are most likely to favour experienced managers. As it stands, that preference is paying off for fund buyers.

Beyond the gate

As predators circle the biggest UK equity veteran of all, Woodford IM yesterday pulled the blinds down on its much-vaunted transparency by suspending access to full holdings data for its funds.

That feels like a futile gesture a week after the Income fund's suspension: even the tardiest of hedge funds can simply turn to external data providers instead. But wealth managers anxious about knock-on effects on other portfolios will have seen little evidence of a feeding frenzy. 

Of Mr Woodford's main holdings, only one or two had a truly catastrophic week, and they're too idiosyncratic for others to worry about. No other UK retail fund manager holds Autolus, the pharma firm that's fallen 20 per cent since last Monday's close. It's more or less the same story for other stragglers like fellow pharma play Verseon.

Other positions have dipped but are already starting to recover. There may be more pain to come once the Income fund sluice gates reopen, but the waters are mostly calm for now. 

The strategy's biggest position, Barratt Developments, has been riding its own wave and risen in line with its sector since last week. Even Burford Capital - a stock closely associated with Mr Woodford, and one also owned by other UK equity desks - has largely shrugged off last week's events. 

That leaves wealth managers considering other impacts. Unquoted positions may be on their minds, but there are few managers with material exposure. Merian UK Mid-Cap is perhaps the most notable, but its 5 per cent position is well within current limits.

Then there is Nick Train: the manager's short-term performance has been hit by Hargreaves Lansdown's 20 per cent slump this month. But he has room to manoeuvre given the shares previously rose 20 per cent in May alone.

Nor is there any sign of his own investors taking a dim view. The Lindsell Train Investment Trust, whose biggest position is Lindsell Train itself, remains on a premium to NAV of almost 100 per cent. A crude proxy for the firm's fortunes, admittedly, but also the polar opposite of Mr Woodford's at the moment.

Performance deviations

Performance fee crackdowns are coming across the continent: both Ireland and Germany are introducing stricter rules including high water marks, minimum crystallisation periods and clawback mechanisms. 

Inevitably, these directives don’t precisely overlap with one another. Research from Fitz Partners emphasises the stricter nature of the German requirements. It calculates that half the performance fees currently levied by Ucits funds comply with the Irish rules as currently proposed, but just 13 per cent measure up by German standards. 

From UK wealth managers’ perspective, the introduction of the Irish rules suggests they can have more confidence in Dublin-domiciled products’ performance fee arrangements in future. The same isn’t the case for other offshore products: Fitz suggests just 40 per cent of Luxembourg-based funds comply with the Irish requirements, and just 10 per cent with the German rules. If nothing else, the uneven playing field may help DFMs work out where they need to pay most attention to manager remuneration.

Get the story behind the stories
The daily newsletter for fund buyers