Misquoted

Investors’ appetite for unlisted stocks is still pretty buoyant - providing these assets are housed in the right structure. But liquidity concerns aren’t the only hurdle for fund buyers to have re-emerged this year.

Shares in the Merian Chrysalis trust currently trade at a 20 per cent premium to NAV. So this morning’s announcement that it will seek to raise another £100m is no surprise. Nor is the fact the trust will then buy unlisted holdings from Merian’s UK Mid Cap fund - as we noted in June, the latter's 6.6 per cent weighting to unquoted stocks sticks out somewhat in the post-Woodford era.

Not all trusts are reaping the rewards of this focus, however. Old-fashioned unquoted-asset investors, ie private equity firms, are still finding it hard to attract interest in their own listed vehicles.

Discounts for private equity trusts still sit firmly in double-digit territory, in the main. Winterflood thinks the greater focus on costs is having a particular impact this year, now that wealth firms are having to comply with Mifid II and Priiips disclosure demands when it comes to trusts.

"Anecdotally, it appears that some wealth managers are struggling to justify allocating to listed private equity funds as a result,” it suggests.

The broker acknowledges that private equity fee structures, which still breach the 2 and 20 mark in some cases, are expensive. Nonetheless, it says buyers’ reticence is a “mistake” given the potential returns on offer. But with cost pressures starting to bear down on wealth firms from all directions, a significant change of tack on their part feels unlikely.

Under the radar

The performance of the US stock market yesterday was a prime example of how things are becoming trickier for allocators. 

On the face of it, the S&P 500 didn’t move at all: down 0.01 per cent on the day. Closer inspection shows a lot more going on, all to do with a reversal of fortune for recent winners and losers.

That meant the energy sector was up 1.9 per cent, and healthcare shares fell by an average of 0.6 per cent. Bespoke Investment pointed out that the top 50 stocks in the index fell by 1.5 per cent, whereas the bottom 50 rose by some 3.4 per cent. 

The moves have been pinned on greater economic optimism: trade war worries have receded again in recent weeks, and the US economy is not deteriorating as fast as some had feared.

There are other facts to consider. Significantly, tech shares were also lower, with falls in the high single digit regions for some cloud software providers. 

That suggests these companies are now more vulnerable to bullish sentiment than they once were. Elevated valuations are being reconsidered at times of relative optimism, rather than vice versa.

It’s very easy to read too much into a single day’s activity. At the same time, minor shakeouts like this can reveal some truths about how investors are positioned, and what might happen in the event of a more sustained reversal of fortunes. Allocators would do well to keep an even closer eye on US share prices in the months ahead.

Real returns

New figures from Morningstar repeat a familiar story for fund selectors: the average active manager struggles to outperform their passive equivalents over the long term. The proportion doing so over the decade to mid-2019 stood at 35 per cent, at best, and single digit percentages at worst for the major equity sectors.

Some areas, such as UK mid-cap active funds, did perform better: more than three-quarters beat the passive equivalent, after fees, over the 10-year period. But the overall trend is clear.

As we’ve noted before, discretionaries’ own selections tend to do rather better than these averages - though they’re not without their problems, either. So far, our analysis has focused on shorter holding periods. In the coming weeks we’ll be extending those time horizons to see how DFMs’ favourites have fared over the medium and long-term - and whether this tells us anything about their fund selection habits.