Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.
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Taking up the baton
As the second quarter gets underway, things are still looking pretty rosy for equity investors. Cyclical and domestic shares are continuing to move higher, and a pullback in bond yields has helped bolster tech stocks’ recent recovery. Even the more conventional bond proxies, such as utilities, have done better of late.
With this relatively serene backdrop in mind, thoughts again turn to the medium-term future. The question of whether to stick or twist remains an active one for allocators. For many, that decision might boil down to a regional one: either stay the course with US shares - whether they be the large-cap winners of recent years or the smaller companies that have rallied markedly over the past six months – or return to the more cyclical, unloved UK market.
There's another unloved area that is being closely pondered in some quarters. The speed and scope of the US recovery is still making headlines at the moment, but Bank of America has suggested that Europe – where a full economic recovery from Covid-19 losses is not expected until late next year – is primed for a better news cycle.
With low expectations baked in, the bank notes the number of economic datapoints surprising on the upside is rising, whereas in the US the number of better-than-expected figures is already starting to subside. European nations may be locking down again as cases pick up, but their vaccination programmes are also beginning to accelerate, and that could help smooth the outlook for later this year.
This year marks a decade since the euro crisis: from the point of view of the average professional fund selector, the region’s never truly regained its lustre since that point. But European shares' near-pariah status doesn’t mean they’ve been the very worst part of the global equity universe: European indices have done better than emerging markets over the past decade.
Over the past year, however, they have lagged peers again. BofA thinks improving data could yet see Europe become “the flag-bearer for the next leg" of the rally, given almost half its benchmarks are focused on cyclical sectors. Fund selectors might soon be pondering these prospects more closely.
One economic activity that never really slowed down is fund management M&A, and Europe’s no exception here either. Today brings news that Amundi has entered exclusive talks to acquire Lyxor from SocGen for €825m.
The combined group will become the second-largest business in the European ETF market, behind only BlackRock. Things are a little different in the UK, where the dominance of index trackers, among other factors, means the likes of Vanguard, Fidelity, L&G and HSBC are among those with a far greater market presence.
Lyxor’s ETF offerings have been of growing interest to UK fund selectors in recent years, but they remain a minor part of most portfolios, at best. Our fund selection database indicates the company has more of a presence in UK DFM portfolios than Amundi, but popular selections remain relatively rare. It’s in the bond market where Lyxor ETFs have the strongest foothold, via its gilt and US Tips strategies.
But this isn’t the only viable business line it provides Amundi in the UK. Some €77bn of Lyxor’s AUM is in ETF products, but another €47bn is actively managed. Much of this stems from the company’s alternatives Ucits platform, and it’s this that attracts the most attention from UK wealth firms.
This distribution mechanism has brought several previously unavailable strategies within DFMs’ reach, meaning products like the Lyxor Tiedemann Arbitrage Strategy now feature in some model portfolio ranges. With passive competition as fierce as ever, it’s the alternative space that could prove the most attractive opportunity for UK growth.
Modelling for market share
Another big player moves (more forcefully) into the MPS market this month, via Schroders’ launch of an investment solutions business.
The headline fee emphasises the industry’s current focus on cost: an annual management charge of 15 basis points. Clearly there are other charges, such as those of the underlying portfolios, that need to be factored in, too. But larger firms stand a better chance of bringing these fees down, and not just for fettered services.
Whatever the perceived merits or otherwise of such price points, it’s this kind of charge to which adviser clients are paying attention, not least because it gives them more room to manoeuvre when it comes to their own fees. Following on from the success of Tatton, the 15-20 bps mark is fast becoming a new normal for the pricing of MPS services.