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Asset Allocator

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The struggle to meet buyers' ESG appetites; The Sea change pushing funds up the performance charts

Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.

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Product pause

Fund selectors have been dipping their toes in specialist areas of the market this year – but as you’d expect, new launches have been relatively thin on the ground.

The pandemic has put paid to many a distribution plan; whether that’s a good or bad thing from a fund buyer’s POV is, as ever, up for debate. The numbers are clear either way: there have been 130 UK-domiciled funds launched in 2020 so far, a 35 per cent drop on the amount launched by this stage in 2019.

From a product provider’s perspective, it can be hard to gauge where DFMs are going to turn next. The growing interest in thematic equity funds, to take an obvious recent example, is far from guaranteed to last.

The big exception on this front is ESG. Asset managers, like everyone else, have cottoned on to the potential benefits of sustainable investing and its associated forms. But as of yet, that hasn’t translated into a renewed surge in new products: 11 per cent of all launches were ESG or sustainability-focused in 2019, and that figure’s only ticked up slightly to 14 per cent this year.

That could all change in 2021, as product pushes get back underway. And there's certainly scope for more diversification among wealth firms’ ESG positions: our fund selection database shows very little in the way of variation among regional equity or specialised bond picks. Buyers are crowding round just one or two portfolios in many of these sub-sectors – which suggests they could be tempted to try something different.

We’ll be taking a closer look at buyers’ ESG preferences in the coming weeks – and on December 9, we’ll discuss wealth managers’ ESG allocations in more detail in an exclusive webinar. Stay tuned for more details on that one.

Sea change

When DFMs reflect on their holdings’ 2020 performance, they’ll have one or two key return drivers in mind. But the year hasn’t just been about the Faangs, or the rise of sustainable investing. Other parts of the market have been powering away under the radar. In the technology world, for instance, it’s not the Faangs or even the BAT shares that have had the most outsized effect on portfolios this year.

To take the top performing fund in the IA tech sector as an example: T Rowe Price Global Technology equity is actually underweight the US by several percentage points. Its success is, in part, linked to a stock that’s also held by the single best-performing Asia Pacific and emerging markets funds of 2020. That company is Sea Limited, whose shares have risen more than 300 per cent year to date.

The business, an e-commerce and gaming provider that focuses on South-East Asia, listed in the US in 2017 and has seen shares rise by well over 1,000 per cent since the start of last year; this summer it was proclaimed “the world’s hottest stock” by Bloomberg.

Such returns, needless to say, don’t come around too often. The firm is backed by a more familiar name to fund selectors - Tencent has a 20 per cent stake – and is a feature in portfolios like Baillie Gifford Pacific and JPM Emerging Markets.

Yet overall interest among fund managers remains relatively low – perhaps because they don’t believe such increases are sustainable. The company did record a sizeable loss in 2019, but that’s often par for the course for tech companies. For the moment, its rapid rise has paid out handsomely for the select few managers who are backing the business.

Merge in turn

After a brief pandemic-induced pause, wealth manager merger and acquisition activity has picked up where it left off. Today, at the higher end of the scale, Stanhope Capital has agreed to merge with FWM, the Forbes family office, to create a $24bn company.

Deals are now arriving at all points along the size spectrum: last week saw Alpha Beta Partners agree a deal for MitonOptimal UK, to name only the most recent example.

The structural pressures facing the industry aren’t going away any time soon. That’s not to say there isn’t the potential for growth: the UK wealth “opportunity”, as any listed manager is fond of telling shareholders, is expanding all the time.

Successfully tapping this doesn’t necessarily require deep pockets – but it does require a firm commitment to the UK market, and the ability to keep on sourcing new clients. Meeting the latter challenge in particular is often easier said than done, and while that remains the case, consolidation will continue to ramp up.

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