Fund standouts whittled down as thousands slump; A lone alternative attracting buyers
Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.
Forwarded this email? Sign up here.
Scores on the board
With each day that markets head lower, calls for a temporary suspension of activity grow louder. In the interim, wealth managers and their kind are having to buckle up for the ride.
Volatility across all asset classes has left DFMs with nowhere to hide. Of the 4,000 funds in the UK universe, fewer than three per cent are still in the black for 2020. And among those 100-odd stalwarts are a trio of the physical property funds that have shut their doors again this week.
Even sterling’s precipitous slide has done little to bail out global portfolios this time. And there are, unfortunately, complications for buyers’ domestic equity picks too. The average active fund has struggled in comparison with the index, and the reasons for this are little surprise.
Despite the attention given to the struggles of the commodity-heavy FTSE 100, mid-caps have underperformed large-caps as per usual during the current downturn. Active managers’ tendency to overweight the middle of the market cap spectrum has been their undoing in this regard.
But there is better news for DFMs themselves. Their more value-oriented UK equity picks, like funds managed by Polar Capital and Man GLG, have struggled. But most of the perpetual UK favourites - strategies run by Lindsell Train, Liontrust, and the erstwhile Investec - have managed to beat peers and both the FTSE 100 and FTSE All-Share so far this year.
That will barely be a crumb of comfort for investment managers nowadays focused on client outcomes rather than relative performance. But it does indicate discretionaries are doing something right at a time when everything seems to be going wrong.
Not so fast
The speed of the sell-off has been such that most fund performance charts have a rather vertical look to them in the short term. And the sudden reversal of fortunes will have given some allocators particular cause for regret.
Estimates from Morningstar, detailing buying and selling activity in February, show some of the most heavily-sold funds on the month were those that ended up doing well in March.
In the case of absolute return funds, redemptions followed the pattern seen for 18 months or more. That meant that some of this month’s notable performers - like Invesco GTR - remained among the worst-selling strategies in February.
It’s also far from surprising that China funds had their worst monthly redemptions for five years. But this sector, too, has been a relative winner amid the March madness.
Not all opportunities have been missed, however. One uncorrelated asset that has been steadily increasing its popularity among wealth managers in recent months is TwentyFour’s Monument Bond fund. The strategy took in £400m in the first two months of 2020 - by far its most popular period since launch in 2011.
Its focus on European asset-backed securities - with a low-duration, floating-rate portfolio of assets - has performed well even during a period when long duration, fixed-rate bonds have flourished. Its March dip also compares favourably to the majority of other flexible bond strategies.
The fund remains very much an exception to the rule. It ranked as the only active retail fund in Morningstar’s 15 best sellers for February. That represents a new high watermark for passive strategies’ dominance of the retail sales charts. Whether this trend persists through March remains to be seen - as we said yesterday, the answer might not be as simple as some suspect.
Little in reserve
It’s not just the FTSE 100 stock falls that have got more attention than their peers. The prospect of dividend cuts among the biggest payers may have been in the spotlight in recent days, but lower down the scale the payout reductions or suspensions have already begun.
The likes of Marstons, William Hill and Micro Focus have suspended dividends this week. On their own, these actions won’t move the dial when it comes to overall UK market payouts. But there’s the obvious risk of more widespread action as the country shuts down.
Investment trusts, with their dividend reserves, may look an attractive option in this light. But Stifel warns that many trusts launched over the past decade in specialist areas like debt and leasing have little in the way of reserves. Others, including those in equity sectors such as UK smaller companies, have been paying dividends out of capital. Prudent selections are about to become even more important in the income world.
