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Allocators' excess equity overweights; Discretionaries dance around unquoted assets

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Too big to bail

The fact that global equity funds contain a big chunk of US stocks is well known to wealth managers. But the size of those positions may still raise some eyebrows. The FT reports that one in five funds now has a US weighting in excess of 60 per cent.

In this regard, the US market is a victim of its own success. US stocks now account for almost two-thirds of the MSCI World index. For the MSCI All-Country World the proportion drops a little, but still stands at 55 per cent.

Almost one in three global funds hold more than this in their own portfolios, according to the FT. Our own analysis, conducted back in October 2018, showed a slightly more variable state of affairs. Of DFMs’ global favourites, a quarter held more than 55 per cent in US equities.

Today we run the rule over the top picks again – and though some of the names have changed, the underlying trend has not. Four of the selection breach the 60 per cent threshold, but there has been little change in the make-up of these portfolios.

Of those included last time, the biggest changes have come at Rathbone Global Opps, which has upped its allocation from 58 per cent to 67 per cent, and via two income funds. Both Artemis Global Income and M&G Global Dividend have dialled down their exposure by more than 10 percentage points.

The US isn’t a big dividend payer anyway; these changes mean the average weighting among the five most popular global income strategies now stands at just 38 per cent. Once again, there may be an opportunity to be had for those looking to diversify via a global portfolio.

Restricted access

One unheralded reason why active managers often struggle to beat their benchmarks: most stocks tend to do something similar. That was the finding of research from SocGen published last week, which showed that only 20 per cent of stocks across the global have beaten the S&P over the past two years.

Once again, this is partly a story of excess returns across the Atlantic. Bloomberg points out something similar – though it also notes additional research suggesting active managers don’t get enough credit for holding back the tide of individual stock underperformance.

But the original point made by SocGen’s Andrew Lapthorne was subtly different. Its emphasis was on another point that has caused much gnashing of teeth lately: the slow decline of public markets.

He says that making a traditional CEO target more difficult – ie reducing the chances of their share prices outperforming the index – may be contributing to the drop-off in IPOs and boom in private equity.

Asset managers themselves are trying to capitalise on this trend as best they can – and, wisely given recent events, are increasingly looking to investment trusts to do so. That makes sense from a liquidity perspective, but it will also ensure this remains a niche pursuit for the foreseeable future.

 And the private equity investment trusts of old are yet to see a material rebound in appetite – 3i aside, discounts on these portfolios remain at double digit levels. Trading levels are also relatively subdued – even the £1bn trusts in the space rarely have more than £1bn in daily liquidity. Compare that to the US, where the private equity boom has meant “the ease of trading chunks of private equity funds has also improved”. One way or another, UK wealth and fund managers are going to have to work out a way to gain better access to these markets.

Trust issues

As if a lagging retail sector and the low-hanging cloud of Brexit uncertainty weren’t reason enough to think twice about open-ended UK property funds, another threat hoves into view. As FTAdviser reports this week, tax changes due in January could hit some investors using the funds, potentially triggering further outflows before implementation.

For all the focus on short-term uncertainty, it’s structural shifts like this that could hurt demand for an open-ended approach in future. The Woodford fallout will not help, and for some wealth managers a new pricing structure has already proved offputting in certain funds.

As we noted yesterday, many DFMs have taken a new tack, tending to access both infrastructure and property via investment trusts, funds of funds or vehicles that also hold real estate equities. But when it comes to UK property trusts, patience will be key: Winterflood data shows that 12 of 14 UK direct property trusts traded on a discount to NAV at the start of this week. Of these 12, nine were at a wider discount than their 12-month average.

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