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A backdrop of global economic recovery, dollar weakness and a renewed commodity boom would appear to be the perfect mix for emerging market equities, but things haven’t quite turned out that way so far in 2021.
Year to date, the MSCI Emerging Markets index has underperformed every other major regional or country index in local currency terms. Results aren’t much better for sterling investors, either. Part of the problem has been the performance of the big Chinese tech names. In the US, for all the negative headlines around tech shares’ performance, the Fangs have either continued to rally or been flat at worst. But the ‘BAT’ trio – Baidu, Alibaba and Tencent – have seen returns slump over the past three months in particular. The first two are now in the red year to date, and even Tencent is down 20 per cent from its 2021 peak.
That’s presented a problem for the Asia and EM-focused funds that have tended to overweight such stocks in recent years. The slump should be put into context: all three companies will have played a big role in driving fundholders’ long-term returns. But in the short-term, their travails have hamstrung managers.
As a result, many EM and Asia managers who are overweight both tech and commodities - including those favoured by DFMs - have found life relatively tough this year.
But there are exceptions: a perennial favourite, RWC Emerging Markets is underweight tech and overweight materials, and that’s helped performance hold up pretty well this year. And stock selection is as much a factor as sector positioning, and the renamed Artemis SmartGarp Global Emerging Markets strategy has done even better while maintaining a benchmark weighting in tech – in part by shying away from those same BAT stocks.
Wheat versus chaff
DFMs’ own performance remains altogether orderly: with five months of the year almost up, the typical model portfolio range’s spectrum of returns is as you’d expect. Both Pimfa and Arc indices put global growth benchmarks at the front of the pack, with conservative strategies bringing up the rear. Riskiest offerings have returned 4-6 per cent on average, and the most cautious 1-2 per cent.
That should prove duly satisfying for both managers and customers. And those clients whose heads may have been turned by rampant returns in the cryptocurrency universe will have had their enthusiasm dampened by events of recent days.
It’s a similar story in the world of unitised multi-asset funds: look at the Investment Association universe, and the typical Flexible Investment fund has returned 4.5 per cent so far this year, compared with a 0.5 per cent return for the most cautious sector. The balanced sectors somewhere in between.
But not all is rosy: there remain perennial underperformers, as highlighted by a report out this week from Asset Intelligence. The consultancy finds there's £22bn in client money sitting in multi-asset funds that rank fourth quartile over three, five and ten-year timeframes, equivalent to around 15 per cent of all assets in the sector.
This money is, by definition, somewhat sticky: prolonged poor performance hasn’t dislodged it thus far. But its continued existence also emphasises the pool of existing assets that’s potentially still available to those who offer compelling alternatives.
Those with deep pockets similarly still see plenty of potential in the UK wealth market, as two events last week emphasised. The first was Swiss firm VZ Group’s investment in Lumin Wealth – showing that appetite from external acquirers is still intact, even when it comes to smaller DFMs. The second is just as pertinent for existing UK allocators: Investec is potentially on the acquisition trail.
The company said in its trading update last week that there were opportunities for “small and bolt on acquisitions”, which is par for the course in the sector nowadays.
Notably, however, the firm also noted “at some point, and we think the time may be right now, [there is the chance of] bigger scale consolidation”. That suggests another transformative deal could emerge in the UK DFM space in the months ahead.