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Asset Allocator

from Asset Allocator

Wealth portfolios fail to read the small print; Fund buyers face up to concentration risks

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Small print

Investors have stuck to their guns in the two weeks since Asset Allocator went on its summer break – little surprise, given investor preferences look much the same if the timeline is extended back two months or even two years.

Yes, there have been periods of major volatility – Q1’s very brief bear market chief among them – but the overriding narrative, ie bond and tech stock strength, remains the same.

That said, the paths taken of late by the likes of gold and the US dollar show there’s still room for nuance. And allocators might not have cottoned on to every trend that’s taken hold since the market bottom in March.

As societies across the globe struggle to emerge from lockdown, plenty of attention has focused on whether the stock market is now completely decoupled from the economy. There are arguments to suggest that investors have behaved perfectly rationally. Companies that are best equipped to flourish have done so, while those most hit by Covid-19 have struggled. As the likes of the S&P 500 are tilted towards the former group, the benchmark has continued to move higher.

But this theory doesn’t entirely hold weight when you consider the performance of small-cap shares. Smaller companies have now extended their spring rally into the summer. 

Small-cap benchmarks have outperformed their larger counterparts in every major region over the past few months. That makes sense given the widespread return to risk assets. What’s more notable is that this outperformance has accelerated further over the summer months. So much so that the likes of UK and European small-cap indices are now ahead of mainstream benchmarks on a one-year view, too. The Russell 2000, meanwhile, has now caught up with the S&P 500 over the same period.

Yet few allocators – wealth managers included – seemingly believe in the rally enough to go fishing lower down the cap scale. On a risk-adjusted basis, that makes sense for more cautious portfolios. But those tasked with maximising equity exposures may be starting to think they’ve missed a trick.

Buyer beware

The death of unitised funds of funds has been predicted on many occasions over the past decade, but the structure is still proving its worth. The emergence of fettered, passive multi-manager options has helped with that, particularly at a time when indices have climbed higher en masse.

A new report from Morningstar concludes as much, and also notes that such strategies’ risk-adjusted performance tends to be pretty good for both passive and active variants.

DFMs will be well aware of the competitive threat posed by such strategies – if they’re not already running unitised structures themselves, that is. But the report is also valuable for its investigation of the most popular holdings in active multi-manager strategies, and its analysis of how some funds’ investment registers are dominated by a small group of big players. The most obvious example is Allianz Strategic Bond: as of March, almost half of its assets were held by just nine funds, according to the analysis.

That concentration may have started to thin out as more wealth managers come on board, but there are other instances: Evenlode Income, Fidelity Asia Pacific Opps and Miton European Opportunities to name three more prominent examples. As we’ve discussed in the past, wealth managers will soon have to do more of this type of analysis themselves if they’re to remain abreast of key investor risk.

Long and winding road

It would be remiss not to remark upon the latest stage of the FCA’s response to the industry’s property fund suspensions – it’s now proposing notice periods of up to 180 days be introduced. With daily dealing requirements still front and foremost in retail distribution, many have noted that such a move would effectively be a death knell for such strategies.

Discretionaries would certainly agree - though the latest round of suspensions was likely the final straw for those still including open-ended property vehicles in their model portfolios, anyway. For wealth managers, the pertinent part of these proposals is that their very existence will push back the point at which these funds can safely reopen.

Property funds were suspended due to uncertainty over their valuations. To remove the gates, they now require both more certainty on that front, and the guarantee that investors worried over new rules wouldn't immediately redeem in their droves. For some, managed wind downs rather than reopenings may ultimately prove the least worst option.

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