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Asset Allocator

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Buyers shun macro mood shift in search for diversification; Herding on the rise for active managers

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Absolute zero

Many macro funds are enjoying a minor renaissance this year - but the evidence suggests few wealth managers think it will last.

Our fund selection database suggests that stellar returns haven’t been enough to get buyers returning in their droves. Even a well-established macro strategy like BH Macro, which has soared again this year, remains a rarity in DFM portfolios.

That’s despite our recent analysis showing that turnover in alts selections has been relatively high in 2020. So where have fund selectors been turning instead?

As mentioned last week, this churn is largely due to old favourites being cast out – and their replacements often stem from different asset classes entirely. But there are some alts picks that have moved up the agenda lately.

One, as highlighted last month, is NB Uncorrelated Strategies. Others include the likes of relative value strategy Lazard Rathmore Alternative and the Sandbar Global Equity Market Neutral offering. Both have found favour with several DFMs in recent months.

If there is a commonality to recent choices, it’s that more buyers are now turning to the specialists – whereas before they were happy to buy absolute return offerings run by fund firms whose strengths traditionally lay in the mainstream asset classes.

But there remains one exception to that shift: Janus Henderson UK Absolute Return. The long/short fund now stands far ahead of peers as the most popular absolute return or hedge fund pick. And its relative success during the Q1 sell-off simply confirmed its status as the only consensus selection left in the asset class.

Alpha beater

Not all funds successfully proved their worth amid the market slump earlier this year. Working out which strategies are best equipped to withstand such rigours is, quite clearly, a vital part of the fund selection process. And research from Clever Adviser suggests those that do something different have a better chance of succeeding.

Funds that deviate from their benchmarks tend to produce more value for investors than those that don’t: this much is well known by selectors. Clever Adviser’s analysis suggests there are two related issues to consider. The first is that the older a fund is, the more similar it becomes to the index. This, as the firm notes, can be the result of asset gathering: as assets swell, the need to invest outside the stated strategy increases.

The second issue is that many funds tend to move closer to their benchmarks during “an extended period of market decline”. That has implications for active investing’s touted ability to protect on the downside. And the issue is widespread: the company found almost half of all mainstream equity funds available to UK investors have at least a 90 per cent similarity to their benchmark.

Professional fund selectors would say they tend to focus on the other half of this cohort: those that are genuinely capable of producing alpha. But the scale of the turnover seen in portfolios in the first half of 2020 suggests not all funds have lived up to expectations so far this year.  

Asia absence

One long-serving manager on whom selectors still rely is Schroders’ Matthew Dobbs. So his retirement next year, announced this morning, might present an issue for some.

His Asian Alpha Plus fund may have the same top four holdings as its stablemate Asian Total Return, but as the names suggest their goals are slightly different. The former’s growth focus means the biggest beneficiary of the change might not be in-house, but instead a strategy like Fidelity Asia. Absent other like-for-like alternatives, some selectors might take the chance to reshuffle their hands and adopt a slightly less aggressive approach to the region. Either way, the departure of another experienced investor is another blow to fund buyers at a time of considerable uncertainty.

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