Asset AllocatorJul 10 2019

Recession risks hinder wealth managers' goldilocks goals - but appetite for alts surges

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Wall of worry

Clouds continue to gather over the global economy, and wealth managers have reasons to be concerned, too. Their peers increasingly believe a recession might be on the way, and bellwether stocks are starting to slump.

Absolute Strategy Research’s quarterly multi-asset survey shows allocators believe there’s now a 45 per cent chance of a global recession in the next year - the fourth consecutive survey in which this figure has increased. 

Its gloomy findings were reinforced yesterday by corporate news: German chemicals giant BASF warned profits would almost halve in the second quarter due to the global slowdown.

BASF isn’t widely held by DFMs’ favourite fund managers - even income funds have remained relatively uninterested in a healthy yield that keeps ticking up as the company’s share price drops back. But it does act as a barometer of corporate health - meaning all manner of manufacturing shares fell back yesterday. The question for many companies is whether the H2 pick-up in activity on which they are relying will truly come through. 

There are still reasons for optimism. Last Friday’s US jobs figures suggest the slowdown hasn’t truly taken hold just yet. 

But that in itself might jeopardise the stock market balancing act. To that end, today’s a day when investors will fret that the bad news isn’t bad enough yet. 

Expectations of a US rate cut later this month were knocked slightly by Friday’s better-than-expected data. Fed chair Jerome Powell speaks to Congress later; hawkish comments would prove problematic for those awaiting an easing of policy and a weaker dollar.

Conversely, with that easing all but priced in, a dovish position might not have much of an impact, either. Sustaining the goldilocks environment is becoming more difficult, and one way or another that will have implications for allocators.

Second thoughts

This caution means many investors have resisted the temptation to pile into rising equity markets this year.  But the trend is not without its exceptions. For one sign of bullishness, note a fresh record notched up when it comes to secondary fundraising from investment companies.

Existing trusts raised £4bn in the first half of the year, according to AIC data. That’s the highest level for the first six months of any year, and for any six-month period altogether. By contrast, trusts raised £2.2bn on the secondary market in H1 2018 and £3.4bn in H1 2017 (the previous record).

What’s different this time? Very little, it turns out: a continued thirst for yield has helped income-generating alternative assets in the property and infrastructure space pull in further funds. With some bond yields dropping to record lows this year, this kind of exposure will continue to find an audience.

It’s a stark contrast with what happened in the primary market at the back end of 2018, when difficult conditions spelled mixed results for a series of trust IPOs. Notably, the likes of Merian Chrysalis and Mobius Investment Trust have returned to markets this year now that things are calmer.

For DFMs, new opportunities in the alternative income space - an area that, for all the hype, remains relatively unexplored by their yield-focused strategies - can only make them less reliant on stocks when it comes to generating yield.

But given many of these names have performed well, some wealth firms have already backed out of the space in anticipation of fresh fundraising at more attractive prices. As volatility rises, the likelihood is that there will be more of these decisions to make in the coming months.

Peering at passives 

Those who thought the UK regulator might step back from asset management this year have had reason to think again in recent weeks. The outcome of the Woodford affair - a reconsideration of ongoing work on illiquid assets - was inevitable. Less expected is the news that the FCA is to lead an international review of passive investing. 

That study, announced by the International Organisation of Securities Commissions in March, will focus on issues like corporate governance, the allocation of capital and whether the rise of passives affects the price discovery process - as well as a “conduct-focused mandate” on the role of index providers in asset management. 

The FCA said yesterday it is heading up this process. Iosco reviews tend to be fact-finding rather than proscriptive affairs. But passive providers can be sure that any major discoveries will be factored into the UK watchdog’s own thinking in the months to come.