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The major oddities of UK fund selection; Trends vs tremors in equity markets

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Home bias

Research from CoreData showing that fund buyers still don’t attach much importance to ESG factors will come as little surprise to those in the UK industry. But other findings are more revealing about UK selectors’ preferences.

UK DFM and wealth manager priorities are, the study suggests, somewhat different from the norm. Take performance track records, cited by just half as a crucial factor in selection processes. By comparison, around two thirds of buyers in other regions prioritise returns.

And yet domestic DFMs are altogether more watchful of their existing holdings: the proportion who review active manager positions at least quarterly stands at 71 per cent. In the US, that drops to 49 per cent; in Europe, just 43 per cent do likewise. So UK wealth managers are more likely to be aware of why a given fund is underperforming - they’re just less likely to do anything about it. 

One theory is this has to do with the structure of the investment chain on these shores. Nowadays, UK fund buyers’ client base contains a decent proportion of financial advisers as well as wealthy individuals. And the need to explain themselves to this audience is paramount. 

Yet the overall pattern of domestic fund buyer preferences can’t be pinned on this dynamic. UK selectors place huge importance on investment philosophy, and manager processes, when picking funds. The survey finds very few buyers agreeing that anything other than these criteria are crucial to fund selection. 

As a result, it’s not just performance track records that are given a lower priority. Compared with European and US peers, UK buyers are much less likely to view risk management processes, fees, manager tenure, or fund size as being of vital importance.

The one remaining area on which domestic buyers do put more importance is, in fact, ESG. Overall ranking of this criterion is still pretty low, but UK selectors are trailblazers of sorts: one in 10 buyers say ESG is a key factor, compared with just five per cent of those on the continent and nine per cent of those in the US. But while this is a growing area of interest across the globe, domestic selectors' idiosyncrasies in other areas are likely to stay in place for the foreseeable.

Best vs the rest

Another consensus call that’s thus far failed to pass muster this year is the prediction that investors should start shifting away from US equities in favour of other regions. Clearly, this move was never going to take place overnight, particularly after a decade of outperformance. But thus far in 2020, price action has provided little in the way of an indication that a change is imminent.

By and large, January has seen the dominant trends of recent history reassert themselves even more forcefully. That means momentum strategies have continued to put the squeeze on value plays - the shifts seen in September look like another false dawn for now - and tech stocks soaring once again. That, in turn, has helped US indices take an early lead over peers this year.

Decent earnings from Apple overnight have given another fillip to the tech bulls. For active managers, this dominance is an increasingly big problem. Benchmark weightings make it difficult for them to overweight such stocks.

That’s particularly so for those running dedicated tech funds, where the likes of Apple account for even greater proportions of their indices. The 10 per cent limit on holding individual stocks means that while active tech funds top the performance pile thus far in January, they’re once again lagging their passive peers.

These issues aren’t new, but they are growing more pronounced as current trends persist. But outside the US, some shifts are starting to take place. In Europe, for example, the consumer staples that have flourished during a nervous time for investors on the continent are now starting to fall behind. That's one area worth keeping an eye on as 2020 continues.

Suspended animation

The continued suspension of the M&G Property fund may look a little strange at a time when a degree of normality has returned to markets - and when the fears of contagion have largely proven unfounded.

Nonetheless, the need to ensure the fund isn’t at risk of reversing course as soon as the macro backdrop worsens means a cautious strategy makes sense. 

The notion of caution is, of course, relative. More buyers than ever before now consider the very idea of an open-ended physical property strategy to be foolhardy in the extreme.

At the same time, the ongoing series of updates on the fate of Woodford Equity Income will ensure that liquidity concerns remain front and centre this year, even if evidence of widespread issues proves harder to come by. And however long it takes for distributions to be made and portfolios to reopen, the reputational repercussions will linger much longer than the actual events themselves.

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