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Wealth firms find solace in alts survivors; ESG's moment in the sun starts to burn

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A better alternative

It’s hand-wringing time again for hedge funds. Alongside this week's figures on a lack of launches came the news that Lansdowne Partners is to close its flagship strategy. And that’s been followed by looks at how equity hedge strategies in general have struggled once again in 2020.

Wealth managers might have some sympathy on this front, given the backstop provided to many markets by the Fed’s recent actions – and the seemingly inexorable rise of tech et al. All the same, as wealth firms reflect on their own selections this year, they’ll be relatively content with what they see.

As we noted again yesterday, absolute return is no longer the flavour of the month for most discretionaries. But it’s the multi-asset variants that have fallen from favour: a sizeable proportion of wealth firms still look to Ucits long/short funds for something different. And in contrast to the analysis mentioned above, many have done well enough this year.

Janus Henderson UK Absolute Return, to take the most popular example, shed just 1.7 per cent between the start of the year and the market lows in March. It’s lagged during the subsequent rally, but few will mind that under the circumstances.

There may be a slight sense of regret over abandoning multi-asset strategies: the erstwhile big three, run by ASI, Invesco and Aviva, have all performed similarly to Janus Henderson. But discretionaries have arguably found better alternatives: many popular Ucits hedge fund picks proved compelling in March. Favourites like BH Macro, Montlake Dunn WMA and AGR Managed Futures all posted Q1 returns of 6 per cent or more.

Again, they too have lagged during the recovery, but that’s a small price to pay. And the one big blow up among DFMs’ preferred plays – AHFM Defined Returns – has at least made back most its losses in the rally. So while there’s no doubt that hedge funds and absolute return strategies are less popular than they once were, selectors who stuck to their guns will be pretty happy with how things have panned out.

Wilting under the lights?

Boohoo shares have slumped again this morning, and have now lost 40 per cent of their value since last Friday. At one point this morning that loss extended to 50 per cent. Investors have clearly been caught unawares by the allegations over its supply chain – and none more so than ESG funds that held the stock.

As ever, there are questions as to whether those investors should have been unaware. Holders have said their own site visits were to their satisfaction, as were commitments made by management. But the burgeoning scandal emphasises that ESG strategies can very quickly find themselves facing serious reputational risks.

And reputation, needless to say, is all important when it comes to ESG. For the future standard bearers of active management, poor performance may be less of a problem than greenwashing.

That arguably means due diligence processes must be stronger than all others’, and better than they are at the moment. This is easier said than done when it comes to smaller teams at smaller fund houses – though in theory it should be simpler when it comes to companies with domestic supply chains, like Boohoo.

The latest episode perhaps also emphasises that the net will be forever tightening around ESG funds, as the push for better standards grows stronger, and the bar for holding a stock in their portfolios rises accordingly. Such strategies are enjoying a moment in the sun right now – but as the spotlight stays on them, they may find the glare gets more and more intense.

Sharing the wealth

On Monday we discussed a familiar spectre that was lingering over, if not quite haunting, this afternoon’s Summer Statement. But it would be remiss not to mention the other pertinent taxation reform that’s received growingattention during the crisis: a wealth tax.

The idea is very much at a nascent stage – few agree on whether it can or will take the form of a one-off tax or a recurring levy, though the idea of dressing it up as an “NHS surcharge” has already been mentioned. But its emergence is understandable, particularly as the Treasury will soon be looking to refill its coffers.

Wealth managers, as the name implies, wouldn’t be best pleased. But with a certain degree of cynicism, they could at least take heart from the fact that higher taxation means more complexity – and that would tend to mean more clients seeking out their services. At this rate, that bridge may have to be crossed before too long.

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