Fund buyers at mercy of over-optimistic liquidity hopes; Wealth firms rush to expand MPS ranges
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Warning signs
Lest there were any doubt, UK regulators haven’t forgotten that they too are supposed to be taking fund liquidity more seriously nowadays. The wait for the FCA’s report into the Woodford IM collapse continues, but last week the regulator did publish a separate analysis, in conjunction with the Bank of England, on attitudes to liquidity management.
Despite an environment of heightened scrutiny, the BoE suspects some fund managers are still too complacent. Fund selectors may be demanding (and receiving) more comprehensive liquidity assessments than ever before – but those analyses aren’t necessarily accurate.
In particular, most corporate bond fund managers seem to “overestimate the liquidity of their holdings”, with some being “particularly over-optimistic”, according to the report.
Overall, three in five corporate bond funds indicated that 90 per cent of their holdings fell into the two most liquid categories of security. Given the regulators’ survey period encompassed Q1 2020, when, as it notes, liquidity conditions “deteriorated significantly”, the accuracy of managers’ assertions is clearly up for debate.
Fund selectors would hope stress tests like those seen this time last year don’t come around too often. Still, UK regulators are not the only ones who’re troubled. The European Securities and Markets Authority’s own assessment, also published last week, found similar failings.
Given the events of the past week, it’s also worth noting what it calls the “particularly worrisome cases” where the impact of possible margin calls “were not considered at all”. We’ve previously discussed the degree to which DFMs are beholden to fund managers’ assessments of their own portfolios. Flaws like these might make them even less inclined to take that data at face value.
Crowding in
A couple of years ago, we looked at the burgeoning number of model portfolio ranges being offered by wealth managers. Back then, the predominant variant on the conventional MPS was the addition of an income-focused model or range of models: 70 per cent of discretionary managers offered such services.
By contrast, only a third offered either ethical or sustainable models. At the time, such services were only just starting to take off, having previously been the preserve of bespoke portfolios. But as we noted, the mere existence of ESG models suggested some were able to find a “happy medium” between tailored services and catch-all strategies.
Two years later, it’s no surprise that many more wealth managers have moved onto this middle ground. Re-run the numbers in 2021, and the proportion of DFMs offering ESG models has risen from 33 per cent to 54 per cent.
That’s perhaps not quite as large as jump as some may have expected. But factor in the proportion who offer ESG overlays, or work with external partners to assess the ESG merits of their existing portfolios, and the overall number would rise higher. Add in those whose websites and marketing literature now makes mention of sustainable investing, and you’d have more or less a full house.
Whether all these services have sufficient shelf life – or whether the future of DFM ESG investing, like so many other parts of the investment world, will be about the first movers and those with the biggest pockets – remains an open question.
Holding back
The run-up to the Deliveroo IPO was notable for the number of fund managers who said they wouldn’t back its business model. The initial aftermath looks like it will be remembered for the sharp plunge in the company’s share price: the stock fell as much as 30 per cent this morning in early trading.
That’s been described as a blow to the UK’s ambitions to lure more tech companies to list on these shores, as well as confirming institutional investors’ wariness about an accompanying shake-up in listings rules.
Making the UK market more tech-focused has obvious attractions for both policymakers and, to an extent, investors – the latter being well aware of the lopsided nature of benchmarks like the FTSE. But changing that balance, if such a thing is possible, can’t be done overnight. This morning’s events might suggest it isn’t achievable in the medium-term, either.