Stocking up

The number of equity markets that DFMs will back with gusto is falling all the time. The US may be too big to ignore, but valuations look stretched. Europe and Japan are seen by many as relative value plays at best, while the likes of EM and domestic stocks are not without their own substantial problems.

That said, in many ways stocks are still the only game in town. A grind higher will suit wealth managers, and benchmark considerations, return targets and a relative lack of appetite for other assets all have a role to play.

To get a sense of how that pans out from a portfolio perspective, we’ve assessed Balanced portfolio equity weightings for a selection of firms in our database, as of the end of May:

As the chart shows, there are some notable outliers. One firm had just 30 per cent of assets in equities as of the start of last month. By contrast, the bar at the right hand side of the chart shows another name with a weighting of nearly 80 per cent.

But what’s most striking is the uniformity on display here: more than two thirds of the names in our sample are running an equity weighting of between 50 and 65 per cent.

It suggests most DFMs are still reluctant to deviate too far from an area that has performed so well in recent years – even if they think risk assets could boil over in the near future. When it comes to backing away from equities, just a smattering of Balanced portfolios have gone for a weighting below 50 per cent.

Yes, benchmark and risk-rating constraints are a factor. But there isn't nearly so much uniformity in other asset classes. The 60/40 portfolio is alive and well - in that it's 60 per cent equities and 40 per cent something else. We'll take a closer look at the spread of fixed income and alternative fund allocations later this month.

Swings and roundabouts

Attention having turned to other illiquid assets in recent weeks, the coast has been clear for open-ended property funds to continue with a slow-motion slump of their own. 

Investors’ shift out of the asset class around the turn of the year - a move which prompted some funds to shift from offer to bid pricing and saw the regulator get involved - has started to accelerate again in recent months. 

UK Direct Property funds suffered almost £500m of outflows in April and May. June data is unlikely to be much better given the increased focus on liquidity mismatches.

As of yet, our own fund selection database shows little sign of a concerted flight by DFMs who do still hold open-ended property. Nonetheless, some wealth managers think fund firms’ attempt to stem outflows have only exacerbated the problem.

Janus Henderson and Columbia Threadneedle have sought to end the price swings involved in switching from a bid to offer basis (or vice versa) by moving to a new structure that levies transaction costs more equally. The downside is that the spread between buying and selling prices has widened on a permanent basis.

Alan Beaney of RC Brown thinks the changes will create issues for buyers wanting to rebalance model portfolios, and says his firm has started to shift into closed-ended property funds instead.

Some in the closed-ended world see other opportunities emerging from open-ended fund outflows: Regional Reit announced a share issue of up to £100m last month after identifying a “pipeline of potential deals…in a market with fewer investors for the type of assets we are currently reviewing”.

Funds that serve a different type of investor are already putting up the shutters: the Workplace Pensions Prudential UK Property fund said last month that withdrawals would be subject to a six-month delay so it could sell assets. Few would be surprised if others ended up following suit once more - and wealth managers holding such strategies have evidently decided that’s an outcome they’re willing to work through.

French funk

As the odds of a no-deal Brexit rise again, figures from the continent suggest one of the biggest related concerns for asset managers may not materialise after all. As previously discussed, there have been more positive noises about portfolio delegation - the nuclear scenario of fund managers being forced to ship out to the continent - this year. And the French charm offensive launched in the aftermath of the 2016 referendum appears to have failed.

The number of funds registered in France has fallen by almost 10 per cent since the start of 2012. That’s despite numbers rising across the continent and indeed in the UK. No wonder, then, that the French asset management trade body has begun making a series of recommendations in a bid to “re-energise” the industry. More evidence, were it needed, that it will be easier said than done to remove the UK's status as an asset management hub.