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Off the beaten track?
Latest fund flow data from Morningstar emphasises a rotation away from US equities in March – but of a very particular kind.
Estimates for last month show funds sitting in the IA North America sector saw net redemptions of £1.2bn on the month, the highest level for two years.
The vast majority of those outflows stemmed from passive products. Flows into and out of tracker funds can be tough to analyse, given the way big holders tend to switch in and out of positions fairly regularly. But it’s notable that core North American tracker funds from iShares and HSBC, as well as an internal passive product run by Aviva, all saw sizeable redemptions on the month.
There was one exception: Vanguard’s US tracker continued to rake in money. And some active funds also suffered – the likes of Morgan Stanley’s top-performing US Advantage strategy, in particular. But appetite for index funds across the board appeared to wane in March.
These shifts could conceivably also reflect developments in the DFM world. As we discussed yesterday, most professional fund selectors are seemingly content to adopt a blended approach for now. If that means balancing two different types of funds, it may be the generic offerings that lose out.
Elsewhere, it was more or less business as usual. UK equity funds remain on the backburner, and responsible strategies continued to flourish. Last month saw a gap open up between Morningstar’s analysis of sustainable flows (+£2.3bn) and those recorded by the IA (£217m, the lowest level in a year). It remains to be seen whether that disconnect persisted in March.
Earlier this month we mentioned the data lag that’s long been a fact of life for those trying to make sense of fund management statistics. But a month or two here and there is nothing compared with the latest publication from Esma this week, which analyses fund performance in the calendar year 2019.
The document is, in fairness, pretty detailed. And while many of its findings regarding performance may now be well out of date, there are some valuable takeaways.
The main points of note relate to ESG. As of the end of last year, ESG Ucits strategies accounted for 10 per cent of the total investment universe, according to Esma. Two thirds of those sustainable assets sit in equity funds, a figure which is comparable with UK data published earlier this year.
There’s also a less intuitive finding. Whereas ESG ETFs typically had total costs of around 72 basis points, compared with 54 basis points for non-ESG offerings, that gap is flipped on its head for active funds. The typical ESG active product is 10 basis points cheaper than a regular active strategy, Esma found.
Given the heightened levels of due diligence demanded of ESG strategies, and the associated costs involved, this finding may look unusual to some. But there are two potential biases at play here. The first is that ESG products remain less common in the parts of the equity universe that tend to cost more: areas like emerging markets, in particular.
The second is that asset managers are now more likely to launch or prioritise ESG products than they were a few years back. Strategies that are being actively marketed, or promote for the first time, must fit in to a competitive pricing environment. In short, there are far fewer legacy ESG offerings that can sit in the background raking in large fees for providers.
Lowering the bar
A final note on classification for now: we can’t let this week end without remarking on the imminent introduction of ETFs to the Investment Association’s fund sectors.
Due to take place next week, the inclusions could transform many of the categories: there are, after all, more than 500 funds expected to join the existing cohort of 4,000 or so strategies. With many of those likely to be equity based, the effect on those sectors could be greater still.
Professional selectors have never had much truck with such groupings, but shifting average performance data – or, at least, ensuring there’s a much larger group of ‘average’ funds – might still have implications for the active funds. In smaller sectors, for instance, it might soon become much easier for a fund to rank either first or fourth quartile without their performance deviating too much from the mean.