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Asset Allocator

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Fund buyers’ 2020 lessons help with delegation risks; MPS holdouts stick with unloved bond bets

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Screening processes

As the UK’s Brexit transition period draws to a close, a big worry for fund managers and selectors has belatedly resurfaced. Delegation rules, which in their most extreme form could prevent UK-based managers from running EU-domiciled strategies, are up for debate once again. But there’s reason to think fund selectors will be less fearful of this outcome than they would have a year ago.

Two years after a failed French push to tighten up these rules, the FT noted last month that the European Securities and Markets Authority’s proposal to overhaul the current state of affairs had sparked “alarm” among UK firms. Then last week Ignites Europe reported that the European Commission had asked for views on existing arrangements as part of a new consultation paper.

Ripping up the existing rulebook still feels like an unlikely scenario. But if it did happen, asset managers in the UK, US and elsewhere would have to relocate managers or reassign management responsibilities, and selectors would struggle to maintain prior levels of face-to-face access.

Of course, 2020 has provided a useful test case on this front. The rise of Zoom-based manager meetings has aided some aspects of fund selection – allowing for more meetings, more regular updates, and in some cases a degree of informality that might give a buyer plenty of soft signals about the manager in question.

That said, an inability to read body language and the trials and tribulations of technology can make virtual meetings feel more formal than their offline equivalents. Balancing these pluses and minuses has become a necessary part of fund selection this year. And if the worst does eventually happen on delegation, selectors will at least recognise that a lack of in-person access isn’t necessarily a deal breaker these days.

Emerging market doubt

It’s been a long time since emerging market debt was a choice asset for the average DFM. But after years of being on the wrong side of wealth manager sentiment, has 2020 changed buyers’ thinking?

As an asset class, EMD has sometimes struggled to find its niche among fund selectors. The yields on offer have always made it a little more attractive for income mandates. That aside, the risk profile of the asset class might appear to lend itself best to less cautious portfolios. In reality, EMD is often more prominent in wealth firms’ defensive models than their more aggressive offerings.

As wealth managers move up the risk scale, the ability to add more equity risk often comes at the expensive of EM bonds. As a result, the typical balanced model still has less in EMD than in any other bond sub-sector.

The number of DFMs who bother with the sector at all is still relatively limited: just one in four has exposure. Only short duration strategies, also owned by just one in four balanced models, can rival that lack of interest.

But those who do own the asset class tend to do so in relatively large proportions. The average weighting to EMD among those who hold it in balanced models is more than 5 per cent. And there’s been little sign of a reconsideration so far this year: allocations have stayed more or less constant since the start of 2020. Having spent the year reconsidering their approach to the likes of HY and IG credit, many fund firms are still finding it hard to reach a definitive opinion on EMD. It looks like discretionaries, too, are content to stick to their existing approaches for now. 

Listing losses

That acid test for UK equity investment trusts is quickly looking like it will dissolve all comers. This morning saw Buffettology managers admit defeat in their bid to launch a UK equity trust, two weeks after Tellworth did likewise.

Wealth managers have long known that their peers have little appetite for conventional trust launches nowadays, but the trio of recent initiatives suggested that fund managers either knew something they didn’t, or simply saw the valuation opportunity as too good to refuse.

Today’s news means it’s only Schroders, who plan to raise £250m for its own trust, left standing. In this context, it’s perhaps instructive that the company has yet to publish any information to the stock exchange regarding its own IPO. That means no hard deadline for fundraising, and gives it some wiggle room in its bid to sound out willing investors. How long this process will take, given the latest evidence of subdued demand, remains to be seen.

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