Worst is over?

After months of relative decline, the rally in sterling seen since last Thursday has got allocators thinking again about UK assets - even though that bounce may already be over.

DFMs have never been able to avoid taking a view on the UK, of course; home bias is never fully escapable. The same can’t be said for global allocators: nowadays the country barely accounts for 5 per cent of the MSCI World index. 

As a result, it’s been easy to disregard it entirely, even if valuations look superficially attractive. The global fund manager consensus, according to the latest Bank of America Merrill Lynch survey released yesterday, is to “ignore it for the next decade”.

Yet UK bank share prices rising by 20 per cent in a week is enough for anyone to take notice - even if it’s to ask whether the opportunity has immediately been and gone.

There are already signs that an EU and Parliament-approved Brexit deal may not pan out. But prices will have to fall a long way to fully give up the gains made over the past few days. And, given how far prices moved in the absence of any particular detail, the rally arguably had as much to do with positioning as it did with the prospects of a deal. 

For the first time in a long while, short-term allocators began to worry about the risks of missing out on a UK rally. Those who are short sterling might also feel slightly more uncomfortable about doubling down, given the speed and size of the moves seen over the past week.

Short covering is far from the same as turning bullish. A net 39 per cent of European managers intend to remain underweight the UK over the next year, per the Baml survey. That won’t be reversed any time soon. But while it’s a bold prediction to make this side of October 31, some may now think the moment of maximum bearishness on UK assets has already passed.

Professional ethics

It’s been another difficult year for the reputation of active asset managers, but ESG practices are increasingly seen as a beacon of potential light. Get this right, and a path to future prosperity becomes more visible.

While UK retail appetite for these kind of investment approaches continues to lag, asset managers say there has been a step change in awareness of such issues over the past 18 months.

These practices remain very much in the eye of the beholder: the question of what constitutes an ethical or sustainable approach is not going to be definitively answered any time soon. But at the very least, almost every large asset manager is now working hard to codify their internal sustainability guidelines - if they hadn’t done so already. 

Frameworks like these mean rating the companies in which they invest on a new set of criteria. They also involve asking different, and perhaps difficult, questions of those firms on areas like climate change.

For now, reassuring clients that these projects are ongoing is seen as a promising first step. But if current trends continue, there might soon be a reckoning for asset managers who pronounce their sustainable credentials but continue to invest in fossil fuel businesses. Whatever the room for manoeuvre when it comes to defining sustainability, the likes of BP and Shell are unlikely to ever shake off their pariah status in the eyes of certain clients. 

As fund managers work harder to meet their investors’ requirements on this front, some say these attitudes are already being reflected in share prices.

A fund manager who wished to remain anonymous has noted to Asset Allocator there are signs that oil companies are starting to decouple from the oil price itself - perhaps because the weight of money investing in these companies is no longer there in such volumes. Shifts like these would have a significant impact on investors of all stripes - however much their own strategies correspond with an ESG mindset.

Bold timing

Perhaps only Vanguard would consider it good timing to launch an active UK equity fund on the same day the UK's most renowned strategy was forced to wind up. Passive providers’ reputations, after all, have long been inversely correlated with the fortunes of Neil Woodford in the eyes of many. 

Having tasked Baillie Gifford with running 50 per cent of the mandate, and Marathon Asset Management the other half, the new fund’s structure is akin to that adopted by St James’s Place. The pricing is not: Vanguard’s fund has an OCF of 0.45 per cent. 

But this method has had limited success thus far. The company’s existing range of active funds for UK investors debuted in mid-2016, yet none has as much as £100m in assets. Vanguard has more than £1trn in active strategies globally. Not for the first time, however, the UK market is proving a tough nut to crack for new entrants.