Wealth managers versus the global shutdown; ETFs in the spotlight as dislocations emerge
Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.
Forwarded this email? Sign up here.
Choking up
With investors continuing to sell as other parts of daily life start shutting down, there are growing calls for markets to follow the latter path instead and cease operations for a while.
Examples cited include the brief post 9/11 closure - though that was mainly for operational reasons - as well as the ‘bank holiday’ of 1933. One unusual trailblazer, the Philippines, has already shut its equity, bond and currency trading on an indefinite basis.
Unsurprisingly, Philippines allocations represent little more than a footnote for most DFM Asia ex-Japan fund favourites, let alone their other equity allocations.
But a more widespread shutdown would effectively suspend portfolio management activity: if a closure were to work, it would need to be coordinated across multiple regions. The alternative would be even more indiscriminate selling on bourses that remained open, as investors sought something to sell.
Wealth managers whose business relies on outsourcing by adviser clients would find themselves facing existential threats as a result. Even those who provide services other than investment management to the bulk of their clients would struggle, given the fee cuts that would be necessary.
Then there are the clients themselves to consider: those drawing down pension money, for instance. And institutional pension funds’ ability to liability match would be called into question.
There are simpler reasons to oppose closures, too - not least that government co-ordination should be focused on direct responses to the crisis. An alternative, as highlighted by an FT editorial today, is to take the Australian route and call for a reduction in trading volumes. That would be much more in line with DFMs’ own thinking - but they, and their underlying fund managers, may find that even this stricture has unwelcome lessons for price discovery and market liquidity.
Make or break
To pick up the above theme: Every sell-off, nowadays, is accompanied by concerns that ETFs might break down under the pressure or exaggerate existing market moves. And the speed of the current slump means those theories are front of mind again for many allocators.
Events such as those we discussed yesterday, wherein the prices of some ETFs have been trading at discounts to NAVs, also suggest that all is not exactly well.
SocGen, however, has analysed trading volumes between the end of February and March 11 and found that, so far, most worries have not yet been borne out by reality.
It says ETFs that have traded on discounts to NAV, such as US high-yield bond trackers, did so because the underlying market was illiquid rather than due to stress in the vehicle itself. In this context, ETF prices represented “the effective benchmark prices of the underlying market”.
So the tail didn’t wag the dog on this front. Nonetheless, the bank does acknowledge that large redemptions from certain ETFs must have weighed on underlying markets. This trend was particularly pronounced in fixed income: aggregate redemptions from two US high-yield bond ETFs amounted to 27 per cent of the average daily volume in the underlying market between Feb 24 and March 11.
In Europe, in the investment grade space, this dynamic was even more noticeable. SocGen estimates that outflows from the iShares Core Euro Corporate Bond ETF equated to 44 per cent of underlying market volumes.
Outside of these examples, there were no ETFs that accounted for more than 10 per cent of total volumes. The bank also notes that there hasn’t, to its knowledge, ever been an example of a product suspending in the manner of open-ended funds. So while redemptions from some vehicles have put more pressure on markets, there’s little evidence yet of a systemic risk - or a good reason for allocators to stop using such strategies.
Cool and collected
Troubled times demand clear communications, but not every fund manager is up to speed. Ignites Europe reports some fund selectors’ frustrations at being “fobbed off” with information that’s been compliance-d beyond the point of usefulness.
Boutiques, inevitably, are deemed better at getting message across. And despite a few examples of bad practice, the general sense is that the asset management industry as a whole has a greater understanding of what must be done nowadays.
The same can be said of fund selectors and wealth managers themselves. Any wealth firm worth its salt will have always been up to speed on client communications, and these days they have more tools at their disposal. The danger, if anything, is overkill: repeated 10 per cent drop notifications may not be avoidable, but they do little to instil anything more than a sense of panic in clients. Careful guidance to go alongside those messages will be required in the coming weeks.
