What goes up

We need to talk about Tesla. Another 20 per cent rise overnight for one of the world’s more divisive stocks means it’s now doubled in value in just six weeks. A giant short squeeze is under way, and then some. 

Fuelled by better-than-expected results, in turn driven partly by demand from China, there’s no sign of coronavirus-induced anxieties here. Instead, the volume of shares being traded in recent days has jumped significantly - another sign of short covering in action.

In sum, while this is a short-term move, the extent of the rise is such that wealth managers may already be reconsidering some of their fund selections for 2020.

Not all will have exposure: Tesla may polarise opinion, but UK fund houses have tended to stay out of the fray. The company isn’t part of the S&P 500, and hence is typically an off-benchmark position - meaning very few active managers rank the stock in their top ten holdings. 

The obvious exception is Baillie Gifford: Scottish Mortgage and Baillie Gifford American have shot back to the top of the performance charts this year. At the other end of the spectrum is Jupiter Absolute Return, whose manager James Clunie has been shorting the stock. 

Those fund selectors who have no stake in the argument might feel it’s safer to keep steering clear for now. But those who hold the above funds (and there are plenty who do so) face a difficult choice.

Tesla is up another 4 per cent in pre-market trading today; set against this is the argument that rises of this kind look more unsustainable - and more likely to go into reverse - the longer they continue. Then DFMs must factor in their belief that conviction positions should be held for the long term. Sell or hold, it's an unenviable decision to make at this juncture.

Cost crunch

Yesterday we discussed how fund firms’ value assessments may start to shake things up across the retail investment sector this year. These analyses are a belated result of the regulator’s asset management market study. At the time of the study’s publication in 2017, many viewed it as a damp squib. But the watchdog has continued to slowly turn the screw since then - with episodes like the Woodford affair giving all the justification it needs to continue doing so. 

Compared with the scrutiny being placed on asset managers and financial advisers, DFMs have largely managed to avoid the direct gaze of the UK regulator. But they’ve had problems of their own to contend with - and ‘value for money’ is again front and centre. 

Mifid II cost disclosure requirements are continuing to have a sizeable effect on new business at a number of wealth managers. In a competitive market, the impact of these changes is evident wherever you look, from MPS price cuts to merger and acquisition activity.

At a portfolio level, however, our fund selection database shows limited evidence of buyers switching into cheaper funds. Instead, they too continue to put pressure on providers to provide greater value for money - whether it be via cheaper share classes, economies of scale or other forms of preferential pricing. But if new business remains hard to come by this year, and markets take a turn for the worse, selectors might find their own choices start to come under a little more pressure.

Reflection point

One sign that passive providers are already ruling the roost - in aggregate at least - came yesterday, with the publication of the Pridham Report detailing retail fund flows in 2019. Three of the top four biggest asset management winners had their passive businesses to thank: BlackRock, LGIM and, most notably, a resurgent HSBC Global Asset Management were those that stood out.

All that said, there are plenty of flag bearers left in the active world. Another pretty good year for both bonds and equities meant fund firms of all different shapes and sizes - from RLAM to Rathbones to the inevitable Fundsmith - enjoyed a healthy 2019.

The emerging asset allocation questions of the new decade might change all that. But one area whose future looks assured is sustainable investing - as Liontrust, ranked sixth by net retail sales last year, will attest. Many fund management CEOs will have already concluded that ESG is the best way to future-proof their business. In keeping with the trends we’ve seen among passive providers, there will be plenty who find that they have left it too late to create a space for themselves in this part of the market.