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Enemy at the gate
The latest fund suspension of 2019 won’t worry most wealth managers - in and of itself. But the headlines it will generate outside the trade press will once again weigh on the reputation of the UK’s investment industry as a whole.
M&G’s decision to suspend its £2.5bn Property Portfolio yesterday didn’t come completely out of the blue: property funds have been in the spotlight all year due to a combination of an FCA review, persistent outflows, and the gating of Woodford Equity Income.
But clearer skies may well lie ahead for UK assets, raising the chances of the portfolio reopening relatively quickly - as it did in 2016. Rival strategies are holding much more cash, meaning contagion could yet be averted. And DFMs have moved away from open-ended property funds in any case - just one now holds the M&G fund, according to our asset allocation database.
But few are complacent about attitudes to liquidity in 2019. The reputational impact is such that newly listed M&G plc (now incorporating the UK arm of Prudential) has seen its shares fall 6 per cent since the news broke. To the retail investor, or the high-net-worth client, this is one more example of alarming behaviour from open-ended funds.
Wealth managers themselves may wish to ponder events from a different angle. The M&G fund’s relatively modest cash pile has dwindled further in recent months, falling from 10 per cent in the summer to 5 per cent by the end of October. The logical conclusion is that this level has fallen to meet outflows.
And yet, for the July to October period at least, redemptions weren’t any higher than in the early months of the year. That implies properties have become harder to sell, which again is a reasonable assumption. The alternative is that M&G has embraced the FCA’s recent wish for property funds to hold lower levels of cash.
Back in September, we were sceptical that such attitudes would take hold. If they do, then the opening and closing of property funds could become a regular occurrence - one which, despite relatively relaxed attitudes among professional investors, finally spells the death knell for the sector.
October outflows from the UK Direct Property sector don’t look particularly alarming, according to figures released this morning. Net redemptions of £150m on the month are right in line with the recent run-rate.
That may have increased in November - the M&G fund’s independent valuers knocked 3.6 per cent off its NAV last month, which was unlikely to have gone down well - but the overall picture from the latest data is of a funds industry in slightly better health.
While long-term laggards like property and absolute return funds continue to see outflows, the figures do provide confirmation of a recovery of sorts for other problem areas. UK equity flows reached a six-month high in October - though this still translated into small net redemptions for equity income and smaller companies strategies. But it seems clear that the temporary easing of no-deal Brexit concerns helped soften anti-UK attitudes.
Elsewhere, all the talk of a style rotation did little to dampen buyers’ interest in the world’s largest stock market - quite the opposite. North American equity funds enjoyed their highest inflows for 18 months, taking in a net £317m. Add to that further signs of life for both emerging markets and Asia ex-Japan funds, and equity funds in general also saw inflows reach their highest level since April 2018.
There are still some nagging questions for wealth managers, however - even once the issue of whether these trends will last is put aside.
These questions are bound up with the issue of retail investor sentiment touched on above. D2C investors have now withdrawn money from funds for the past 18 months. The optimistic case is that more of these investors are shifting to advised or DFM mandates. The downbeat assessment is that bad publicity has started to have an impact on attitudes to investing.
Bigger in Japan
As investors look again at the value stocks on offer in the Japanese market, the government has revived memories of the early years of Abenomics by unveiling a $121bn stimulus plan. While larger than expected, the programme hasn't yet ignited investor sentiment: the Topix has barely moved since details of the plan were reported earlier this week and confirmed overnight.
A sense of fatigue may be to blame. While investors are ardently in favour of stimulus packages elsewhere in the world, it’s a more familiar prospect in Japan.
The other uncertainty relates to the recent hike in consumption tax, which could offset some expansionary measures. The tax rose from 8 per cent to 10 per cent in October, the first increase in half a decade, having been postponed in part because of the impact previous rises had on consumer spending.
Still, Japanese indices have gained ground since October, in line with improving attitudes to value stocks. It might just be that Japanese markets are now more dependent on global trends rather than anything the government does on home territory.