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Asset Allocator

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A stumbling start for 2021's consensus call; Clients await end to transfer tribulations

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Emerging issues

As the dollar regains its poise, emerging market equities are back in the headlines - for the wrong reasons. Recent performance is far from disastrous, but nor has it lived up to recent hopes: the benchmark index's return of 5 per cent in the first quarter was half that seen for the S&P 500.

That’s a reversal of end-of-2020 expectations, when a majority of managers thought EMs would outperform the US index in the near term. UK-based fund firms were pretty positive, too, according to our own analysis.

For now, emerging market stocks are taking up their familiar place at the back of the queue for equity investors. Compared with the strength of the US, the recent rally for Japan, and the sense that the UK and even Europe offer better value prospects, and it’s no surprise EM is low down the pecking order.

Nor did wealth portfolios really buy in to the improving sentiment seen at the end of last year. There have been one or two signs of allocations moving higher, but turnover activity remains muted at best. Over the past 12 months, little more than a third of DFMs have either bought into or sold out of an EM equity fund across their model portfolio ranges.

Factor in changes to other equity allocations over that period, as well as market rotation that began almost half a year ago now, and this stoicism is unusual. There are two possible reasons: one is that caution remains the watchword, and confidence in the asset class is so low that selectors prefer to add at the margin rather than making big calls.

The other is that existing EM favourites have done a pretty good job of navigating the shift in investor interest over the past six months. The likes of RWC Emerging Markets have continued to outperform, and other top picks have kept pace with the sector even as the world starts to position for recovery. So far, there’s been no price to pay for staying put.

Platform for growth

The rise of on-platform model portfolio services means that discretionary managers, like their adviser clients, have grown accustomed to technology issues in recent years. A spate of replatforming processes have typically been accompanied by outages and customer frustrations.

But the very shortcomings of those technologies have usually meant there's been little that users can do in response. Advisers are well aware that their ability to shift entire books of clients to a different platform is virtually non-existent. Consider how painstaking it is to transfer individual portfolios from one D2C platform to another, and the scope of the problem for those with hundreds or thousands of clients becomes clear.

Could a different future finally be in sight? The past year of enforced remote working has obliged platforms to move away from paper-led processes. To take one example, Standard Life requires 75 per cent fewer paper forms than it did a year ago, according to the NextWealth consultancy.

These kinds of shifts pave the way for bulk transfers to become a whole lot easier. Digitisation isn’t a silver bullet – for one thing, there remains plenty of difficulty in incorporating idiosyncratic client circumstances into an automated process. Porting across historical client data is also an issue.

But steps in the right direction are being made. And in a world where DFMs’ own platform presences are much more considerable, swifter bulk transfers would have plenty of implications for competition among MPS providers.

Return of the Mark

Mark Barnett continues to follow in the footsteps of Neil Woodford. A few weeks on from news of the latter’s putative comeback comes the announcement that the former is also returning to fund management.

The comparisons probably end there: Barnett’s arrival at Tellworth should prove more intriguing for investors. His only sin, after all, was underperformance. A move to an up-and-coming fund boutique, at a time when his investment style is back in favour, will attract some attention. But it may well take a while for assets to follow. Most fund selectors will want to get a sense of the new portfolio’s shape, and let some more water flow under the bridge in the meantime, before they cross paths again.

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