Asset AllocatorOct 9 2019

DFMs start adapting to new era of due diligence; Fund buyers await value assessments

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.

Forwarded this email? Sign up here.

Water under the bridge

Time flies when you’re withholding funds. The issue of liquidity risk has been debated so frequently and so forcefully this year that it’s slightly unnerving to note it’s barely been four months since Woodford Equity Income suspended dealing

DFMs have long been cognisant of liquidity issues - and the suspension of Gam’s absolute return bond funds in August 2018 was an earlier reminder that these risks weren’t purely hypothetical. But it took a major event like that seen in June to truly thrust the problem to the top of the agenda - and ensure its presence there for some time to come.

As the FCA and Bank of England explore their next moves, there is plenty of industry activity going on behind the scenes that is presenting its own challenges. 

Unsurprisingly, wealth managers have attempted to step up their monitoring processes in a bid to avoid falling victim to the next illiquid episode. But in doing so, many will have realised just how reliant they are on providers’ own guarantees.

Requests for detailed liquidity profiles of funds are on the increase. But not all asset managers monitor their offerings in such ways, and many have been content to cover off such requests with a blanket “x per cent of our portfolio can be liquidated in x days" statement.

ACDs have a role to play here. The irony when it comes to the Woodford fund is that its ACD was monitoring a deterioration in the fund’s liquidity profile in detail - albeit only following discussions with the FCA. Still, that data wasn’t publicly available.

Fund research teams will be aware that the responsibility falls on them, too. But monitoring individual portfolios brings its own issues, particularly when it comes to bond funds packed with hundreds of holdings. The outflows from H2O’s funds, which followed stories assessing publicly available data, do suggest holders were not aware of the nature of all their underlying investments. 

Alternatively, the rush for the exit emphasised how analyses of risk can change once some holders head for the door. Liquidity is a moveable feast, and getting to grips with the implications of that is a challenge that isn’t going away for wealth managers.

Finding value

Regulation of a different kind means asset managers are already having to provide more information to fund holders. But this week has brought confirmation that implementation dates for some of the newest requirements are being pushed back.

The FCA has given fund firms more time to produce “value assessments” - an annual statement explaining how a given fund provides value to investors. It now says these statements can be produced in composite form, combining several fund ranges in one document. 

The move means the assessments can effectively be published at any point in 2020, rather than within four months of a fund’s year-end as previously mooted. That gives providers more wiggle room - though as these rules are a consequence of the FCA’s asset management market study, final rules from which were published two years ago, there’s been plenty of time to adjust already.

Still, there’s the potential for some interesting reading once fund selectors eventually get their hands on such documents. Mike Barrett at the Lang Cat points out that fund firms will have to discuss potential economies of scale when it comes to the cost of their strategy. Providers will also have to compare their charges to “market rates” and, notably, comparable services such as institutional mandates of a similar size.

Asset managers may well be tempted to give boilerplate answers, of course - particularly now they can cover off multiple funds in one report. But the arrival of independent non-exec directors to fund boards makes that more complicated, as Mr Barrett points out:

Hands up if you’d fancy signing off, under SMCR, that your charges represent value for money relative to comparable services? For some funds this could be a difficult discussion…

DFMs, then, will be optimistic they can glean some useful information from these assessments of value - just not as soon as they first thought.

Another passive push

Good Money Week is in full flow, and ESG product launches keep coming thick and fast. Some firms are going a step further; BNP Paribas Asset Management said last month that its entire active fund range was now adopting a sustainable approach to investing.

It joins a growing number of firms who are increasingly explicit about aligning the way they invest with principles and practices that they believe will stand companies in good stead in future. The perennial issue of what constitutes a 'sustainable' or 'ethical' investment notwithstanding, of course. 

But a bigger hurdle in the shift towards such practices may be the role played by passive funds. The paucity of ESG options in this space is still apparent. Benchmarks that are packed full of unsustainable options may increasingly be viewed as unfit for purpose in future. This is surely the next step for sustainable investment providers: a jump in "self-indexing", ie constructing indices in-house, cannot be far away.