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Liquidity risks haunt wealth managers; Two-speed markets outfox fund buyers

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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Liquidity lessons

Neil Woodford's downfall has been the talk of the retail investment industry over the past month. But DFMs might be forgiven for thinking it's their bond fund holdings, rather than their equity exposures, to which they need to be paying particularly close attention at the moment.

Take branding at face value, and H2O Asset Management should be the last firm to face questions over liquidity. But the FT's reporting on bonds held by six of its funds has raised concerns about just that, leading to outflows and a series of measures from the fund house in a bid to reassure investors.

For UK wealth managers, H2O is best known as the provider of the MultiReturns absolute return strategy - a popular pick among DFMs, according to our fund selection database. It too focuses largely on bonds - but, unlike the strategies hitting the headlines, has stayed away from more idiosyncratic investments. 

Morningstar data shows that MultiReturns' corporate bond exposure is limited to a handful of positions in European bank debt, alongside a sub-one per cent allocation to securitised bonds.

Despite this, the industry's focus on liquidity has left some buyers reticent to speak publicly: none of the holders we contacted last week was able to talk about the fund.

Still, the relatively conventional nature of the portfolio, sticking to government bonds and futures, will have reassured discretionaries. It's logical that an absolute return fund would shy away from the reach for yield - though as we saw earlier this year with the Gam affair, that isn't always the case.

It's been apparent for years that many of those searching for income are being pushed further along the risk scale. Regulators' focus has been on what might happen to those investments if markets lock-up en masse.

But at a time of relative serenity, it's the potential catalysts who will suffer rather than the sector as a whole. Accurate or not, recent events suggest managers should have considered the implications of the spotlight shining on individual portfolios rather than an entire asset class.

Two halves

We wrote last week that almost every asset class is set to end the first half of 2019 in the black. May's blip for risk assets aside, it's been a pretty peaceful climb higher over the past six months.

Yet look at relative performance and, inevitably, things get a little more complicated - and not just on the growth vs value axis, which needless to say remains tilted firmly in favour of the former. 

In the US, for instance, indices are again hitting new highs, but sector leadership has started to shift in the aftermath of last month's jitters.

So while the first quarter of the year was characterised by a rally for cyclical stocks in particular, the past few weeks have seen defensives to the fore again. That means the likes of consumer staples and health care stocks reaching all-time highs of their own. Cyclicals haven't done quite so well; on a 12-month view the gap between the MSCI US Defensive Sectors benchmark and its more economically sensitive equivalent has started to widen again.

This shift, however, hasn't really translated into outperformance for typical defensive plays, namely US equity income funds. The problem is that tech, inevitably, is also among the areas to have done particularly well in recent weeks. That kind of bifurcation is of little help to fund selectors pondering how to refine their US positions. For wealth managers looking for more nuanced exposure, the question of how to ensure relative performance doesn't suffer unduly is as relevant as ever.

Betting on the bank

President Trump has started to turn up the heat on Fed chair Jerome Powell again this month. That's not a wholly unfamiliar set of circumstances for investors on these shores: the events of the past three years have led to a similar uptick in politicians criticising Bank of England governor Mark Carney

Unlike the president with Mr Powell, Mr Carney's critics weren't responsible for giving him the job in the first place. But those optimistic about the UK's withdrawal for the EU may soon get to make a choice of their own, now that Philip Hammond has opted not to push through a decision on Mr Carney's replacement. 

With all aspects of UK society increasingly viewed through the prism of EU withdrawal, a relatively politicised governor is a distinct possibility. Discretionaries should consider the monetary policy implications if the next PM opts to install a Brexit advocate at the head of the BoE in the coming months.

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