Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.
Forwarded this email? Sign up here.
Ins and outs
As markets go, so retail sales follow. In keeping with indices’ own recovery, UK retail fund sales in April and May have almost – but not quite – erased the losses sustained in March.
But behind the headline figures are signs that it’s not business as usual just yet.
Equity funds took in £1.5bn in May, driven in no small part by investors piling in to US funds like never before. Net retail sales of £729m, according to Investment Association data, were more than double the previous monthly record of £331m. Wealth managers will have their own views on whether this is performance chasing or one of the only viable ports in a storm.
Yet some of the best performing regions of recent weeks were still shunned: Europe ex-UK funds, for instance, saw their highest outflows for a year. In contrast, UK income funds still found buyers despite the doom and gloom surrounding the sector.
For those who were nervous about UK dividends, global income funds didn’t hold much attraction as an alternative. Net outflows of £30m may in part be due to the struggles of the sector’s higher-profile offerings. Instead, credit took the lead: both the Corporate and Global Bond sectors took in record amounts in May, netting almost £1.3bn between them.
Other uncommon behaviours were still in evidence, too. One under-reported consequence of April’s bounce in sentiment was the return of Isa season: net flows into Isas outstripped those into pension wrappers for the first time in two years in April, and by a proportion not seen since 2017. In May, pensions returned to the top of the pile. And a net £830m invested into short-term money market funds suggests investors of all stripes were still in wait and see mode.
End of the road
A clear-up is underway in the investment trust sector, according to Numis, as wealth managers take a firm stance on underperforming strategies and – more significantly – boards themselves prepare to bite the bullet.
The broker notes that boards of several companies are now taking “the usual step” of recommending that shareholders vote against continuation. Aberdeen Frontier Markets took such steps only yesterday, but there are plenty of other examples, from SQN Secured Income and Hadrian’s Wall to JPMorgan Brazil and beyond.
The catalyst for this analysis is an ongoing dispute at Gabelli Value Plus, which faces its own continuation vote on July 30. Investec Wealth said this week it would vote against continuation – showing that wealth managers themselves are also taking a tougher line on ITs.
Even accounting for a style that’s thoroughly out of favour, the Gabelli trust has underwhelmed. It has underperformed value indices, though it doesn’t benchmark itself against any particular index. Investec also singled out fees that are increasingly at odds with other trusts’ own charging structures.
There’s another trend at play here: the growing dissatisfaction with value strategies in general. We discussed one example of this shift last month; Numis also notes European IT (now Baillie Gifford European Growth) and Mark Barnett’s former mandates have seen corporate actions of their own. Increasingly, it looks like the end of the line for sub-scale trusts, and arguably for conventional value offerings of all sizes.
It’s not just trust overseers who are recognising something has to give when it comes to value strategies. The board of M&G Securities has acknowledged that the firm’s long-suffering Recovery fund has consistently failed to meet performance targets, and as a result “action must be taken by M&G to ensure it is better placed to achieve its objective”.
As the fund’s objective is to beat the FTSE All-Share over a five-year period, it’s difficult to see what this action might involve. Arguably, the only option is to overhaul Recovery’s investment strategy – a move resisted by manager Tom Dobell for many years, and one which M&G has seemingly had little appetite for, either.
The alternative, with which fund selectors will still have some sympathy, is to stick to the knitting – and insist that value stocks will ultimately outperform peers. But this, self-evidently, doesn’t constitute the “action” demanded by the board. Another crunch point looms for a big-name investor.