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Pointers for fund selectors from a damning FCA review; Equity income moves back up the agenda

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Value trap

The FCA’s first assessment of the value of value assessments, as it were, can be boiled down to a long list of what fund firms did wrong. Professional fund selectors may be accustomed to doing their own due diligence, but many of the regulator’s findings should interest them in any case.

The review of 18 firms said, among other things, that managers’ assumptions were often difficult to justify, in ways which “undermined the credibility of their assessments”.

That won’t come as a particular surprise to those who have cast their eye over those assessments during the past 18 months. But some of the more granular detail is worth scrutinising.

At one point, the watchdog takes firms to task for attributing underperformance to the manager’s style of investing – or more specifically, for not clearly disclosing this risk to investors.

The funds in question seem likely to be value equity strategies, which suggests the underperformance gap will have closed next time round.

But the FCA notes firms had no specific plans to discuss whether such strategies should be changed, or to set underperformance ‘trigger points’ to begin those discussions. DFMs might disagree with these very notions, but it’s worth reflecting on the fact this is deemed best practice by the regulator.

There are other, more pressing, pointers. One firm had integrated an “ESG service” across a range of its funds, but “couldn’t explain why this justified…the additional fees it charged for these funds”. Given ESG’s growing prominence, it’s only a matter of time until these issues are addressed directly by the regulator.

The review also highlights multi-asset funds that compare themselves solely to relevant peer groups. The FCA has suggested they might instead compare risk-adjusted performance with “funds that invest only in the markets to which their funds are most exposed”.

For funds with 75 per cent in equities, that would mean a global equity fund. For many portfolio managers – be they running unitised funds or model portfolios - that would represent a real change in thinking.

Paying off

FTSE 100 dividends are due to grow this year for the first time since 2018, according to AJ Bell research. Total underlying payouts are forecast to be 25 per cent higher than they were last year – a growth rate that would put payments above 2019 levels.

The platform expects the index to yield 3.7 per cent for 2021, which is healthy enough. Large caps are of course helped by the fact that miners and banks have been the first major payers to bounce back – the former due to the commodity rally, the latter due to the end of regulatory pressures.

The rest of the market will take longer to recover from the pains of 2020. But signs of light for large caps aren’t the only benefit on the horizon for UK equity income strategies.

Yesterday we discussed Goldman Sachs’ predictions for the rest of the year; it's worth adding that the bank thinks equity income could be one of the major beneficiaries in the coming months.

It points to the fact that “high dividend, low volatility stocks have broadly underperformed markets since the Covid-19 crisis”.

Indeed, icome strategies (UK and global) have again underperformed their growth-based equivalents both year to date and over the past quarter. But the performance gap is relatively narrow – and if investors are searching for a route between the cheap and expensive stocks, it may be that dividend payers start to find renewed favour with growth investors, too.

Bit by Bit

The FT reports that Marshall Wace is the latest hedge fund to be planning investments in the cryptocurrency space. The idea is to make venture capital investments “in companies involved in the infrastructure of digital finance”, so this isn’t quite a repeat of Ruffer’s rapid entry into and exit from the world of Bitcoin trading.

But the direction of travel is clear: while there remain more than a few sceptics, the rapid expansion of the cryptocurrency universe is going to attract more and more asset managers keen to capture a slice of the pie.

That in turn increases the likelihood that wealth managers – whatever they think of such investments – will find their own portfolios have underlying holdings of this nature, too. Those won’t be meaningful parts of portfolios, but their arrival onto investment registers will be a banner moment nonetheless.

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