Data shortage leaves DFMs rudderless; Buyers' chance for an equity income rethink
Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.
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Fluid situation
Professional investors know it’s important to take a long-term view during a time of crisis. Putting that into practice is sometimes easier said than done. But the speed of the current descent has at least aided them in this quest.
The blunt truth of the current condition is that useful datapoints have never been in such short supply. Needless to say, this isn’t a comfortable position for allocators. The best try to avoid knee-jerk decisions, but that doesn’t mean ignorance is bliss.
Economic data for the opening months of the year is only just being published, but is now the ultimate lagging indicator. And corporates’ own guidance is of similarly limited use: even management has little idea when their businesses might recover.
Instead, allocators who want to take an informed decision have little option but to either be guided purely by market sentiment, or to simply wait it out. In the meantime, they’re reduced to monitoring daily virus caseload data - and risk using overly simplistic country-to-country comparisons to extrapolate future growth rates.
Fund selectors have problems of their own. At a time when liquidity is in the spotlight more than ever, monitoring underlying portfolio redemptions is an important part of the due diligence process. Data on this front has always been weeks out of date. And the fast-moving nature of the current crisis presents additional issues. Last Monday, for instance, saw the Fed step in to backstop the US corporate bond market. That helped prompt a recovery in sentiment and helped issuance return, too. Yet the latest data available, running for the week to last Wednesday, still shows a record level of weekly redemptions.
Buyers might surmise the bulk of these redemptions came at the start of the period rather than the end. What of the issues closer to home? M&G’s Optimal Income fund is among those hit hard by the deteriorating sentiment. Here, too, the pace of outflows has presumably slowed in the past week. But holders hoping the worst is over must wait for volatility to subside and sit patiently until more data emerges.
Worldwide
One piece of information that often leads to an immediate change in allocations is the departure of a fund manager. So it may prove again this month as BNY Mellon’s global income team, led by Nick Clay, departs.
Selectors also have the benefit of knowing upfront that Mr Clay & co will reemerge later this year to run much the same strategy at RWC. And there are plenty of assets that could follow them to their new home. BNY Mellon Global Income held more than £5bn at last count.
The history of manager moves suggests it isn’t always that simple. Even in the most successful cases, some money will be retained by a manager’s old firm, some will go to rivals, and some will be reallocated to different asset classes.
Nonetheless, the next few months will be a good time to wipe the slate clean. The swathe of dividend cuts emerging across the world mean it shouldn’t be too difficult to grow payouts in future for those starting from scratch. And the pressure on UK dividends might finally convince a few more UK equity income advocates to go global in a bid to hunt out the dwindling band of sustainable payers.
DFMs could do more on this front themselves - their equity income preferences also tend towards home turf.
BNY Mellon Global Income is a notable exception in this regard: the strategy is actually held by more wealth managers than growth-oriented stalwarts like Fundsmith Equity, according to our fund selection database. But there are two mitigating factors here.
The first is that it benefits from a relative lack of competition: only one other global income option, Artemis Global Income, has widespread backing from discretionaries. The second is that it’s often only held in DFMs’ specialist portfolios. Of those who hold the fund, 50 per cent only do so in a dedicated income portfolio rather than across their ranges. So there’s still plenty of scope for global income strategies - both those with new managers and those without - to achieve more market penetration in future.
Signature style
The crisis is already having an impact on one set of industry conventions: platforms are gradually abandoning their requirements for wet signatures as they adjust to a world in which advisers and clients are trapped in their homes.
These changes are still incremental in many cases: many platforms have simply switched to accepting scanned copies of documents, a process which still requires plenty of admin on advisers’ part. Digital signatures remain a further step down the road for most.
Still, this is evidence, were it needed, that an external shock can prompt real change to business practices. Those with discretionary powers don’t need to gain client consent as often as advisers. But the holistic services provided by most wealth managers mean there are still plenty of occasions on which form-filling is necessary. The sector should pay heed to the way in which their peers are starting to rip up the rule book in unusual times.
