Alts upheaval

Iain Stewart’s forthcoming departure from Newton may have been well flagged, but it's also reflective of changing times for alternative strategies. 

The manager had already stepped back from direct portfolio responsibilities, and the wider Real Return team has been expanded over the past year. That’s in keeping with a wider preference for team-based structures among absolute return and alternative strategies.

As we’ve previously discussed, the shift to these kind of set-ups has helped fund firms hone their succession planning capabilities in recent times. But star manager culture isn’t entirely absent from the alts space - and even big teams can depart en masse, as in 2012 when Invesco poached its cohort of Gars managers.

What’s more, notable exits have been coming thick and fast for wealth managers in 2019.

Mr Stewart’s impending retirement means four of DFMs’ ten favourite alternative strategies at the turn of the year have seen key names depart of late: Stephen Moore at Artemis, Erik Rubingh at BMO, and James Elliot at JPMorgan AM being the others. 

There have been notable exits in other parts of the fund management universe, too, in keeping with the usual state of play. But the alts arena, despite its focus on team-managed portfolios, may well stay at the forefront of the turnover trend. 

The travails of late 2018, coupled with a swift return to risk-on sentiment this year, shone a stronger light on exactly how capable such strategies are of delivering for investors. At the same time, many fund firms are still looking to scale up their own offerings in the space, and that tends to mean external recruitment. Add to that the usual turnover catalysts like retirement, and more changes in the months ahead seem likely.

Broadening the net

Flexible as global equity funds can appear, many are still beholden to one market. With US stocks representing some 55 per cent of the MSCI World index, it’s hard to stay in line with benchmarks without maintaining a pretty chunky allocation to a market many view as expensive.

That creates headaches for growth and income funds alike, but managers do have some alternatives at the moment. Whereas the US was the sole driver of returns while other markets flatlined in the summer of 2018, there’s less of an obvious decoupling on show for now.

The S&P 500 has gained 1.4 per cent in local currency terms on a three-month view, putting it slightly ahead of the MSCI World’s 1 per cent. European markets have done roughly the same as the global index. The FTSE All Share is ahead of all these with a 3 per cent return.

On a half-year view there’s little between the indices. The S&P 500 has gained nearly 10 per cent, but so have the FTSE All-Share and MSCI World. The FTSE Europe ex-UK index has made a bigger gain, of roughly 11.5 per cent.

So what are global equity managers doing about it? We have again charted the US exposure in DFMs’ favourite global equity fund picks, with the results below:

As the chart shows, most haven't budged far from their US allocations of late 2018. But with the majority coming in below the benchmark weighting and some going well under this threshold, what is apparent is managers are still feeling the need to look further afield for returns. Regional markets' performance in 2019 has justified that strategy thus far.

Dollar decisions

The next phase of the US/China trade war increasingly looks like it might play out in currency markets. Overnight, the renminbi weakened past RMB7 to the dollar for the first time since the financial crisis, as China’s central bank seemingly responded to Friday’s escalation of trade tensions.

A weaker renminbi may ultimately hinder China as much as it annoys the US: recent history suggests Beijing will have to deal with significant capital outflows as a result of currency weakness. But the renminbi’s fall also increases the likelihood that other Asian economies will opt for weaker currency policies in turn.

We noted at the start of June that Donald Trump might ultimately intervene in currency markets in a bid to stem the dollar’s rise. Since then the idea has gained ground among strategists - though the question of whether intervention would prove effective remains an open one. Regardless, FX is moving up allocators' agenda once again this summer.