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Beacons of stability aid DFMs amid mass uncertainty; Endgame for not-so-nimble selectors

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Infra-red hot

Investors’ consensus bets are rapidly becoming an endangered species. Across equities, bonds and alternatives, almost every region in asset class has as many naysayers as it does advocates. But there is one sector where a multi-year boom is continuing in a relatively calm fashion: infrastructure.

Investors who’ve been content to run winners this year are increasingly asking more questions of themselves. But infrastructure buyers are marching on undimmed. In the investment trust space, where most of these opportunities lie for UK wealth managers, infrastructure funds raised some £785m in October.

Year to date, infrastructure has been responsible for £2.6bn of the £7.7bn raised by the entire trust universe. The average premium for listed infrastructure offerings now sits at 10 per cent, and the typical yield is still 4.6 per cent, according to Numis. And the ESG attributes of many infrastructure trusts, most obviously those focused on renewables, are another reason why demand is still buoyant. 

The obvious counter-argument has to do with political risk. With a general election underway, trusts with utilities or PFI exposure have been flagged, once again, as potential risks in the event that the Conservatives lose power. Yet the likes of HICL Infrastructure, one of the more exposed in this regard, continue to trade on healthy premiums.

Announcements from HICL and 3i late last week underline why investors are staying the course. The latter continues to perform in line with expectations in terms of NAV growth and dividend payouts. The former, meanwhile, said it had crystallised value from parts of its portfolio - and successfully recycled money into new investments.

Notably, these sales were public-private partnership projects. As Numis notes, the disposals “remind investors that there is demand for infrastructure assets, notwithstanding the perception of heightened political risk in the UK. It is notable that one of these disposals is an Acute hospital, an area which we consider to carry greater political sensitivity compared with other sub-sectors”. That suggests there’s little sign of a coming storm for DFMs who hold these trusts. The only thing wealth managers have to mind at the moment is the urge to allocate ever larger amounts to an illiquid asset class.

Small mercies

For DFMs struggling with client acquisition, merger and acquisition activity has long been the way to go. Integrating a new business isn’t a shortcut to success, but it does add assets and clients more quickly than any other method. 

And discretionary fund management in the UK is increasingly a scale game. There are plenty of fund selection benefits that stem from managing a relatively small pool of assets, but at a boardroom level these tend to pale in comparison with the ability to clamp down on rising costs and boost bottom lines.

So it’s no surprise to see successful DFMs starting to look further afield in their quest for growth. No longer content with buying up smaller rivals, the likes of Tatton are also now looking at buying up businesses from would-be clients: financial advisers with discretionary permissions.

That makes sense, because advisers’ attempts to build up this side of their business haven’t always worked out that well. Those not put off by the regulatory and capital requirements have often struggled to grow their DFM arms in a competitive marketplace.

The logical conclusion of this kind of M&A activity is that buylist concentration increases further, more money chases fewer funds, and liquidity issues continue to grow at a time when selectors are already rightly nervous about herding activity. 

Those challenges aren’t going away - and nor will star manager culture disappear overnight, despite recent evidence of a shift in investor priorities. But the trends outlined above are unlikely to be accelerated by big wealth managers scooping up the minnows of the DFM universe. That’s because our database shows that advisers’ model portfolios already tend to focus heavily on the most popular funds in the retail investment world.

Seeking safety in numbers is understandable when resources are limited, even if it means that these buyers aren’t making best use of the nimbleness that their lack of size offers them. But it also means small firms being swallowed up by a larger peer won’t necessarily lead to a greater concentration of assets in the same funds.

Widows and orphans

The Widowmaker trade - shorting Japanese government bonds - is so named for having claimed many a victim over the years. Those deaths were typically professional investors who thought Japan’s demographics and debt profile made it a prime candidate for a spike in bond yields.

Nowadays, after years in which sovereign yields across almost all major developed economies have stayed low and then moved lower still, such trades are few and far between. But Japanese 10-year bond prices have just suffered their worst week in six years, and hedge funds are again in the spotlight. Bloomberg says that CTA funds’ decision to unwind their long positions in Japanese government debt may well be to blame

Taking profits on these holdings is an altogether more comfortable affair than having to crystallise losses when shorts go awry. And few would bank on this being the end of the Widowmaker altogether. But it is the latest sign that market dynamics are starting to shift the world over.

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