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Emerging winners

For all the doom and gloom surrounding emerging markets, things have turned out pretty well so far this year. The MSCI Emerging Markets index has, after all, almost matched the S&P 500 in local currency terms. FX weakness has put a dampener on those gains, even for UK investors, but returns remain in the black.

Yet when it comes to asset allocation shifts in times of uncertainty, EM tends to suffer more than most: many fund selectors are happy to pare back exposure just to be on the safe side.

On a fund selection basis, things have played out a little differently. As has been seen in other regions, the trend of recent months is fund selectors spreading their choices more widely. The chart below shows the most popular EM equity picks as of this summer:

As was seen in the US, DFMs’ dedicated income portfolios have pushed an equity income offering to the top of the pile. And again, it’s JPM’s offering that takes the top slot.

What’s new here is that big players like Fidelity and to a lesser extent RWC have fallen back into the pack. At a time when nerves over the asset class are running high, an option like Fidelity EM – with hefty exposure to tech names yet a historic reputation for defensiveness – might seem like a sensible pick. But those attributes, and recent strong performance, haven’t stopped several DFMs from cutting back over the past year.

Again, this may be a call on the region rather than the manager. In other cases, impending departures haven’t yet prompted DFMs to pull the plug. Hermes remains a fixture at the top of the chart despite Gary Greenberg stepping back from portfolio management this month. By contrast, most holders in our database had already sold out of Somerset EM Divi Growth by the time the firm announced the departure of Edward Lam this week.

Tax trap

To VAT or not VAT? The question’s back in the headlines this morning after Brooks Macdonald said that a misunderstanding of whether it should pay the tax led it to overstate the income derived from its managed portfolio service.

As that implies, the question of whether or not MPS services are VAT exempt has long caused confusion. Tatton’s securing of a £1.7m refund from HMRC earlier this summer has further muddied the waters.

Brooks, like other DFMs, is querying the issue with the taxman in light of Tatton’s success. But there’s unlikely to be a definitive answer any time soon – the powers that be are seemingly waiting to see if prior EU rulings on VAT issues are rendered moot, or otherwise, by Brexit.

All this might seem rather arcane to those dealing in the day-to-day business of portfolio management. But there is one aspect of their own roles that could ultimately impact VAT decisions. As the likes of Elston Consulting suggest, portfolios that buy collective investment schemes stand a better chance of being exempt from the tax than those that focus on direct securities – based on EU precedents, at least.

As with most aspects of this issue, there’s a lack of clarity on where the dividing line lies: would exemption also apply to models that mostly hold collectives, or even those that hold just a few? In any case, there’s a potential irony here, in light of the handful of DFMs who’ve shifted from a collectives to a direct investing focus in recent years. Those who touted the cost benefits of such moves may find the boot is ultimately placed on the other foot.

Recovery position

Today's exit of Tom Dobell from M&G Recovery has been a long time coming, given the fund’s many years of underperformance. The manager had earned some of that backing - his 20-year returns are still narrowly ahead of the FTSE All-Share – but aside from a brief rebound in 2016, the fund has been in the doldrums for a long time.

Nor is this just a case of his style being out of favour: it may seem hard to recall now, but other value funds did manage to post compelling returns while Recovery struggled, in the earlier portion of the last decade in particular. The fund’s size, at its peak, made things especially difficult.

In any case, the writing on the wall became impossible to ignore once M&G’s value assessment was published earlier this summer. A fresh start makes sense; the question of what constitutes a viable ‘recovery’ stock in the current market is less straightforward to answer.