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Asset Allocator

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Vanilla assets let the side down for wealth managers; Credit funds overextend again

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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Pressure to perform

Now more than ever, performance matters for wealth managers. Clients dismayed by the travails of 2018, and now armed with Mifid II-era cost and charges information, will have kept a close eye on how this year's rebound has played out. And the early signs are pretty good - when it comes to DFMs' underlying fund selections, at least.

Today we extend our recent look at the 2019 performance of discretionaries' fund picks by examining another five areas: EM, Japanese, Global, and UK smaller company strategies, as well as strategic bond funds.

Once again, the evidence suggests the sudden return to rising markets hasn’t caught out too many active managers. Success is most apparent in emerging markets, where eight out of ten equity funds in the Investment Association sector beat the MSCI EM index. DFMs’ top picks did even better, on average. 

In Japan, wealth managers’ selections also comfortably surpassed other funds - though the lack of diversity in DFMs’ Japanese fund picks meant there were eight, rather than 10, picks making up the dark blue bar in this area. It’s a similar story for UK smaller companies funds.

Discretionaries also stand out on the fixed income front. The strategic bond funds analysed on the right-hand side of the chart were benchmarked against the IA grouping. 

Less than half of all such funds outperformed, indicating that a handful of top performers have dragged the average return higher. But DFMs do hold some of those winners: fund selectors may have been slow to tap into the latest government bond rally themselves, but their go-anywhere fixed income choices are still serving them well.

The same can’t be said for global equity funds. Global strategies on the whole had a middling first half of 2019, relatively speaking. Wealth managers’ picks did even worse. Add to this the UK equity fund struggles we noted earlier this month, and it looks like the vanilla offerings are letting the side down so far this year.

Junking it in

Rising bond prices have meant some familiar concerns are resurfacing for high-yield investors. As the FT reports, sub-investment grade companies are taking advantage of falling yields to extend their borrowing terms. US high-yield issuance with a maturity of ten years or more rose to 17 per cent of all US HY issuance in the second quarter.

Investors have been here before, of course. The above proportion is the highest since the fourth quarter of 2017 - but a return to the credit conditions of 18 months ago doesn’t seem too unreasonable given the current state of affairs. 

Nomura’s Dickie Hodges is among those to have dialled down his junk bond exposure in response to the recent surge in optimism - but again, this weighting is at its lowest level “over a year” rather than anything more long-term.

The sceptics point to uncertainty over the US and global economies and warn that a reckoning is on its way. But high-yield debt has been remarkably resilient over recent times, and looser monetary policy should ensure that continues for a while yet.

As TwentyFour analyst George Curtis wrote earlier this week: “we do see the current benign environment and relatively supportive central bank backdrop as allowing credit to continue to perform in the coming months.”

Inevitably, at this point in the cycle there is a caveat to that. He adds: “we also believe adopting a conservative approach in today’s market is prudent, and will not hurt returns as much as investors may think, given the lower risk premiums on offer.”

For wealth managers whose interest in yield remains undimmed, that point might be worthy of further consideration.

Book ahead

It’s not been the easiest few weeks for Nick Train. His Hargreaves Lansdown holding came under significant scrutiny last month, then he was removed from its Wealth 50 list as a result of that position. Now, with the giant premium on the Lindsell Train IT evaporating, other holdings are starting to struggle.

The manager has long warned of this scenario, writing in an update last month that a period of poor returns “would not at all be a surprise” at this point. As of yet that hasn’t happened; his UK equity fund is still top decile over all timeframes, including three-month performance.

But in the unlikely event that it does all go wrong, Mr Train may have an alternative career to fall back on: in the past few years he has occasionally moonlighted as a book reviewer for Head here to read the manager’s thoughts on recent tomes and judge for yourself.

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