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Asset Allocator

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DFMs' latest liquidity headscratcher; The binary play returning to markets

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Fluid situation

With 2019 drawing to a close, the Bank of England has offered one final take on the issue of illiquid assets in open-ended funds. And while the current suggestions might prompt fresh discussion, what remains clearest is how difficult tackling the problem will be.

The BoE’s ongoing review into the subject, carried out with the FCA, has thrown out a number of options. Funds could assess and quantify liquidity by either the price discount needed for a quick sale of a vertical slice of assets or the time period required to avoid giving in on price. In times of stress a manager could consider different measures to address liquidity issues: either giving investors a price that “reflects the discount needed” to sell up in a certain time, as previously mooted, or adopting longer redemption notice periods.

While some of these ideas are familiar, it’s unclear how well they will fare among retail investors. The BoE notes that measures such as swing pricing can help temper outflows – but these may only prove offputting for a retail crowd in the longer run. Longer redemption periods are also unlikely to find favour – as with the IA’s proposal of a long-term asset fund, investors might find themselves demanding something extra in return for less regular dealing.

With the conclusion of the review due next year, further details may prove more illuminating. But if anything the BoE’s stance on the subject – highlighting fund liquidity issues as a potential systemic risk – could spur further action from the industry itself.

Bounce back

Days on from the Boris bounce and things are looking decidedly less assured at home: sterling lost ground this morning on signs that the UK would once again face the risk of a no-deal Brexit, with the latest cliff edge arriving at the end of 2020. Some UK-listed equities also stumbled, having enjoyed the major gains of recent days.

With perhaps more Brexit certainty established than before, none of this resets the argument for those taking a longer-term positive view on UK stocks. In some areas the election result has already, to an extent, revived confidence. But this morning's news does suggest the ups and downs of the Brexit journey are far from over, and everything that can mean for asset prices.

There are other unknowns to factor in, too. If the general election campaign was marked by a relaxed attitude towards the idea of fiscal stimulus, any spending may be less generous than investors might expect. As the FT noted this week, the government has been warned that it risks breaking its new fiscal rules even before the spending taps are turned on.

All of this may simply equate to further contrarian opportunities. But discretionaries might be frustrated at the prospect of yet more binary outcomes: any major statement on Brexit could once more move the dial for sterling, but also drastically alter fund performance one way or another. It might mean more bargains to be had, but it could also mean DFMs taking a more nuanced approach rather than simply piling into domestic names.

Pot twist

Much as investment managers should welcome any progress in the pensions landscape, there’s one area where improvements on the retirement planning front can adversely affect wealth portfolios.

As Investors Chronicle argues this week, companies with pension scheme deficits should be a cause for concern among income investors, if for an unexpected reason. With an emboldened Pensions Regulator looking for better funded schemes, companies with a gap to fill may use money earmarked for dividends to narrow their deficits.

From a DB transfer surge to 2015’s freedoms, wealth managers are well acquainted with pension shifts and the knock-on effect this can have on their own concerns. But rather than simply affecting the flow of assets in one direction or other, here’s another reason to rethink equity income choices. With dividend concentration issues already prominent, it’s additional food for thought in a strained income space.

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