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Wealth managers seeking viable diversifiers for their portfolios face a tougher challenge than ever in the second half of 2020. Government bonds served them well at the start of the year, but there are plenty of doubts over whether that will persist. And the alternatives that have previously replaced such assets don’t look that attractive, either.
In years gone by, the likes of absolute return and property funds formed a decent chunk of DFMs’ model portfolios. But discretionaries’ fell out of love with the former grouping a while back, and there’s now understandable caution over the latter given Covid-19’s impact on commercial real estate values.
But the fund selector who’s sceptical over sovereign debt, absolute return and property has little choice but to pick a least worst option. Many will see opportunities elsewhere, but few are prepared to put sizeable portions of their diversifier allocations into more esoteric assets. The risk/reward on niche asset classes – whether they be less liquid assets or even commodity plays - doesn’t tend to warrant more than a few percentage points in each.
As a result, DFMs have fallen back on one of the mainstays mentioned above – or else, as we saw in the first quarter, simply hold much more in cash than they would have once done.
The other tactic is to hold halfway houses like corporate bonds. And there is a related asset class that’s starting to reappear on radars this summer.
Convertible bonds are far from inversely correlated with risk assets – their upside participation ensures that – but their performance in 2020 has encouraged more wealth firms to get involved. Losses in the first quarter sat midway between those sustained by strat bond funds and high-yield debt portfolios. Yet in the subsequent rally, convertibles have been able to match junk bonds’ rapid ascent. Downside protection may still be hard to come by, but there are still opportunities out there for those looking to the middle ground.
Playing it safe, by whatever means necessary, was very much the consensus bet of the first quarter. So it’s little surprise that the number of hedge funds launched in that period stood at the lowest level since the financial crisis, according to HFR.
Conventional fund firms found things pretty similar, even when the following three months are taken into account. Figures from Morningstar show just 37 UK-domiciled funds were launched in the first half of 2020, compared with an average of 100 for the equivalent periods in each of the three previous years.
It’s a similar story if the analysis is extended to Ireland-based funds – half as many have been launched this year as in the recent past, though previous years were perhaps flattered by Brexit planning.
Of those that have come to market lately, the majority have tended to fall into one of two categories. The first, as it happens, is wealth managers opting to unitise pre-existing portfolios. Bringing entire ranges into a fund format has helped bolster overall launch numbers. But this trend has ebbed away in 2020 as the crisis takes hold.
The other trend has stayed the course. It is, inevitably, ESG. If anything, the funds have tightened their grip on the new-launch market this year: almost two thirds of the strategies launched in UK and Ireland in 2020 have had an ESG tilt of some kind.
That leaves one previous big player notable by its absence: the rush of passive launches has now almost completely dried up. A saturated marketplace and falling indices have put paid to that for now - but there’s still no stopping ESG.
Interactive investor’s acquisition of the Share Centre will “strengthen the voice” for its flat fee charging model, its chief executive has said. There’s no doubt that the platform’s growing size makes it a viable D2C alternative to the likes of Hargreaves – and its charging structure gives it a unique selling point. But II’s previous business decisions have put paid to such a model emerging in the advised space.
Its decision to sell Alliance Trust Savings to Embark, just months after it acquired the platform last summer, has effectively meant the end of the fixed fee model for intermediary platform users. Wealth managers and advisers themselves still wedded to percentage charging might see that as a good thing. Either way, it will now take a bold move from an incumbent if the status quo is to shift any time soon.