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A flow no-show
A constant flow of manager moves and M&A activity means fund selectors have had their hands full again this year. But there are still significant structural problems facing the retail investment industry that require constant attention, too.
Chief among these is the fact that a growing number of asset managers are surviving on scraps. Of the 900 active open-ended funds in our database of DFM buylist selections, the number that took in net new money in October was just 73.
And this isn’t solely because of a lack of new money coming into the industry – last month was, after all, one in which markets rallied and new opportunities presented themselves. The issue for active managers is that the bulk of that money is still going into passive propositions.
There's a problem for DFMs, too: the way in which these inflows are tilted towards trackers doesn't suggest their model portfolios, which typically combine active and passive propositions, are gaining much traction at the moment. Unitised multi-asset funds aren't shooting the lights out either, but Morningstar figures suggest they still have the edge at the moment when it comes to investor interest.
On the other side of the equation, there were plenty of funds that suffered material outflows on the month. The usual suspects lined up for punishment again: property funds, absolute return strategies, and those whose managers have recently departed.
There was better news for Lindsell Train UK Equity and Fundsmith Equity. For now, both have shown their respective October and September outflows were one-offs - despite the ongoing market rotation away from quality and staples.
On the other hand, outflows from Artemis Income accelerated despite the fund remaining at the top of the performance charts. An estimated net redemption of £580m in October equates to a tenth of the fund's assets. In this case, the likely culprit is one big holder moving away rather than a raft of departures.
The price of everything
Woodford Equity Income holders face losing at least a third of their remaining investments as a result of the fund’s wind-up, according to estimates published yesterday. And the fund’s fate has one final lesson for DFMs and wealth managers.
The strategy’s ill-fated unquoted holdings have been back in the spotlight this month. Those positions contributed a decent chunk of the fund’s returns in the good times; they’re accounting for an equally significant proportion of losses now.
That’s partly because of the need to sell the positions quickly. But accounting rules also mean that, to an extent, the real value of these assets is in the eye of the beholder. That beholder has now changed, and Link and PJT Park Hill are taking a dimmer view of the likes of Industrial Heat, among many others.
And the question of how to accurately value illiquid assets has a wider relevance for wealth managers - particularly those who use them in the non-equity portions of their portfolios.
There's a school of thought that says illiquids' low correlation with conventional assets stems from imprecise pricing as much as anything else. In the absence of regular price discovery, valuations can look resilient at times when risk assets are under the cosh.
So while holding these offerings as diversifiers can work in the short-term, the truth will out in the long run - or so the theory goes.
This thinking doesn't apply to all alternatives. But in a year when the original diversifiers - bonds - have once again shown their qualities at times of investor nervousness, DFMs will be treating some alternative assets with more scepticism than in the past.
To cap it off
An anomalous result in the latest set of Spiva data from S&P Global: a significant proportion of US small and mid-cap managers beat their benchmarks in the year to June 30.
S&P appears a little stumped as to why that happened, noting instead the oddity of the results. On average, just 3 per cent of US small-cap funds beat their index over a 10-year time horizon. Short term figures are better, but usually not to this degree: some 60 per cent of funds won out over the past 12 months.
It was a similar story for mid-cap strategies. Fifty-six per cent beat indices over the period; the 10-year average is just 9 per cent. From wealth managers’ point of view, then, it’s a shame that US small and mid-caps don’t tend to feature in their portfolios all that much. Some of those who have been fine-tuning their US equity selections in 2019 have moved further down the cap spectrum - but in the main, this has been an opportunity missed.