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Wealth firms split on twice-unloved contrarian calls; A sober reality for fund flows

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Alpha quest

At a time when DFMs are reviewing their fund selection calls, the most popular names are starting to look more vulnerable. But signs that turnover is starting to pick up doesn't always spell bad news for big-name managers.

So we return to Man GLG’s Japan CoreAlpha. The fund has already left one DFM's portfolios this year, and its focus on unloved stocks in an increasingly unloved region is making others think again in more ways than one. 

7IM, for instance, has dropped the fund from its active models in favour of a a position in Usonian Japan Value. As the name suggests, that's a similar strategy to CoreAlpha, albeit one that's much less widely held in the wealth management space. The switch was made in part because of performance-related frustrations. Here’s 7IM's Tony Lawrence on the rationale:

You can never rule out them putting in a plus-10 year. [But] the financial position hadn’t worked for some time. They are thinking it will come good when US yields start to rise. Then yields rose and it didn’t come good.

With the fund lagging its peer group average over one, three and five years, the problems are apparent enough.

But one selector's laggard is another's contrarian opportunity: CoreAlpha still has its backers, and Brewin Dolphin has added a small position in the strategy to its core models in recent months. With the possibility of a market rotation always in fund selectors’ minds, switches like these could increasingly set portfolios apart from one another.

Number crunch

When it comes to fund flows as a whole, headline data doesn’t always tell the whole story. Nonetheless, monthly retail fund sales are still closely watched as a barometer of sentiment. So this morning’s news that a net £1.7bn was pulled from UK portfolios in August will have added to UK investors’ current unease.

The figure marks the first material set of outflows in 2019 - data released earlier this year, which showed several hundred million pounds’ worth of redemptions in January, has since been revised to a less dramatic level by compilers at the Investment Association.

But it’s not the prospect of revisions that mean the overall figures have a tendency to mislead. Rather it’s because the data is increasingly dependent on the fortunes of just two sectors: the Strategic Bond and Corporate Bond groupings.

As most DFMs will know, the equity fund universe has seen sustained outflows for more than a year now. That’s been partially offset by a resilient appetite for multi-asset products over the same period. But with property and absolute return flows consistently in the red, it’s buyers’ collective attitudes to fixed income that define each period.

So record-breaking strategic bond fund flows this year have helped mask the pain seen elsewhere. A solid showing for corporate bond funds has added to that positivity. But in August, those flows went into sharp reverse: having taken in a net £250m in July, investment grade strategies saw £350m leave the following month. And after two £1bn-inflow months in a row, strategic bond strategies suffered a net withdrawal of £750m.

This increased nervousness over bonds - gilt funds also saw their first redemptions since February - is effectively the only thing that changed on the month. Most other trends, from tracker funds’ resilience to DFMs’ caution, remained unaltered. Wealth managers looking at this data should bear that in mind.

Relative risk-off

Yesterday morning we said that the clouds gathering over US equities meant DFMs should give more consideration to diversifying their equity exposures. The rest of the day either underlined or contradicted that fact, depending on where you stand. 

The FTSE 100 did its best to match the falls seen across the Atlantic on Tuesday and Wednesday by suffering its worst day since early 2016. Suddenly those US falls didn’t look quite so egregious. Yet those so inclined can still just about construct a case for diversification, given the likes of European equities haven’t fared as badly. 

It’s never a good sign when risk assets are being viewed through a ‘least worst’ lens. But the chances of the US taking this crown in the next sell-off look to have fallen sharply over the past couple of days.

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