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Asset Allocator

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Wealth firms call time on cash cows; A new value rally for 2020

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Cashless society

The elevated spirits of recent months can mean many things: greater conviction on risk assets, less reliance on US equities and even a dabble in value stocks. But it also has implications for that classic haven - cash - both in DFM portfolios and their fund holdings.

At the start of 2019 we noted that DFMs’ favourite equity funds tended, on aggregate, to load up more heavily on cash than their peers. Now, with investor nerves seeming a little steadier, we’ve taken another look.

What’s immediately striking about the latest findings is the fact cash levels haven’t simply fallen across the board. Allocations are higher for both the sector and DFMs’ top 10 picks in Japan, despite the cheap valuations on offer. And after a year of powering ahead, US equity strategies have tended to maintain the same level of dry powder, with wealth firm favourites upping it a notch. Similarly, the EM names backed by DFMs are running higher levels of cash, even as their peers move in the other direction.

That said, there are signs of enhanced risk appetite, both among DFMs and more broadly. If DFM picks tended to hold more cash than other funds a year ago, it’s now only in the UK and Asia that this is the case.

Here, as in other regions troubled by trade-related uncertainties, cash levels are coming off. But when it comes to the UK, DFM picks have reined in their weightings most dramatically compared with their peers – despite the fact that one popular name, Liontrust Special Situatons, still has a hefty 8.3 per cent allocation.

In the unloved European equity universe another divergence is on show. While funds are tending to hold more cash than a year ago, the top wealth picks have pared back their safety buffer.

Value rally

It’s turning out to be a busy month for the regulator. In the same week that it issued a strident warning to advisers about the need for greater diligence around areas such as suitability, the FCA has presented asset managers with a cold gaze and something of a to do list.

The watchdog’s letter to fund firm bosses outlines a good number of ambitions for the industry in the months ahead. Some of these deal with the immediate fallout of 2019’s big asset management scandal: continued scrutiny of fund liquidity is the first item on the agenda.

It’s also understandable that the FCA touches on recent and upcoming challenges – a transition away from the Libor rate, SMCR, the inevitable Brexit preparations and so forth. There's also a separate missive on suitability issues in the alts space. But what’s more interesting, for those who run funds but also those who buy them, is that some of the big regulatory events of recent years are coming back to bite.

Firstly there’s a revisit of the product governance rules that came into force under Mifid II, calling for funds designed “with the best interests of a specified target in mind”. Like liquidity oversight, this appears to be prompted by recent events in Oxford – the FCA notes that conflicts of interest could prevent some ACDs from effectively managing risks in funds.

Notably, this is also the year that funds’ value for money assessments – a prospect outlined in 2017 on the back of the regulator’s asset management market study – finally come into force. Disparate timelines and a tendency to rush towards regulatory deadlines may see fund firms’ assessments come in dribs and drabs. But the FCA also looks poised to take a harder line on laggards via its annual business plan:

We plan to publish certain key metrics, such as on long-term underperforming active funds and trends within the sector to provide evidence of whether the reforms are having their desired effect.

Smart money

If the regulator is once more taking active managers to task on fees and performance, structural shifts continue apace elsewhere. So we turn to the US, where a continued price war in the ETF space sets a precedent for UK shores. FactSet notes that, in the US, "relentless" demand for super low-cost ETFs across all asset classes resulted in $95m of fee cuts in 2019.

No stranger to ETF holdings and the fierce competition among providers, DFMs won't be surprised to see another leg down on the pricing front. With a handful of large operators jostling for market share, fees are only moving in one direction.

But if that's a common trend for generalist products, FactSet adds that the pressure is growing more obvious elsewhere. While fees on plain vanilla equity offerings have fallen from 0.17 to 0.15 per cent over two years, smart beta offerings have become 0.05 per cent cheaper over the same period, with bigger price falls for actively managed ETFs. When it comes to charges, there are fewer places to hide.

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