Risky funds' fortunes diverge amid China crackdown; Fund ratings escape the spotlight again
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Crackdown
It’s Chinese equities’ turn in the spotlight this week, as another leg down for some of the country’s most prominent stocks creates more problems for emerging market investors.
We last spoke about the travails of Tencent et al two months ago – and things have only got worse since that point. Tencent fell 10 per cent overnight as concerns rise over a regulatory crackdown.
That shift isn’t confined to tech sectors: education shares have also slumped after Beijing unveiled stringent new measures over the weekend.
While the long-term picture for Chinese shares is still pretty positive, the issue for wealth managers is that Asia ex-Japan funds, and China-focused strategies at that, have been a useful driver of performance in recent years.
As it stands, that catalyst has been shut down. And as Hawksmoor’s Jim Wood-Smith pointed out yesterday, China isn’t the only problem. A possibility we touched on back in January – the sight of Asia’s relative success at dealing with the pandemic slowly transforming into something less impressive – now seems to be becoming a reality.
Wood-Smith says this “Covid element” has been another factor in the region’s underwhelming performance thus far this year.
He believes the structural, long-term benefits of investing in Asia ex-Japan remain intact. Those wealth managers looking for short-term gains, or those who believe a China discount is becoming more apparent, might be shifting their attention back to broader EM benchmarks. For all the struggles facing emerging markets at the moment, it’s notable that the other building blocks of the old-fashioned Bric construction – Brazil, Russia and India – are having markedly better times of it at the moment.
Mountain or molehill?
Another regulator warning shot was fired across the bows of the sustainable investment universe yesterday, though DFMs would be forgiven for suspecting not much will come of it.
The International Organisation of Securities Commissions has launched a consultation on companies that provide ESG ratings, hinting that national regulators should seek more formal oversight of such businesses.
With ESG ballooning in importance and regulators taking closer looks, this appears like another sign of things to come. The question is whether those things take the form of concrete steps, or whether the consultation's merely the precursor to more hot air.
Action is unlikely to be taken in the absence of regulatory pressure. Even if, say, a global ESG reporting standard were to emerge across the corporate world, the chances of ratings agencies adopting a consistent approach of their own are miniscule. Doing so would, after all, render most of them unnecessary.
In the UK, the FCA itself highlighted ratings agencies back in October last year. Iosco’s consultation, however, is relatively light on ways to resolve the patchwork of existing assessment criteria used by such businesses. Providers “could consider making high levels of public disclosure and transparency an objective in their ESG ratings and data products”, it says by way of an example. That is unlikely to rock too many boats.
One missing link here is the ratings given not to companies, but to funds. When we discussed ESG regulations last week we noted that DFMs have largely escaped the watchdog’s glare in recent years.
The same could be said of fund ratings services, absent a brief flurry of interest in consumer buy-lists following the collapse of Woodford Investment Management. Ranking funds’ sustainable credentials is an important aspect of the retail ESG push. Whether those who do so will catch watchdogs’ attention this time around remains to be seen.
Hic hic
Infrastructure is one asset class that’s delivered for wealth portfolios through thick and thin in recent times. Results this morning from Hicl, still one of the go-to investment trust options in the space, seemingly confirm that – its trading update was more or less in line with expectations, and a yield of 4.9 per cent is about as good as professional buyers can get nowadays.
Not everyone is so enthused, however: broker Stifel has been less positive for a while now, believing the trust’s current 12 per cent premium to NAV is expensive. It points to valuation risks around the likes of HS1, the high price of acquisitions, and the likelihood of more equity issuance to come.
Our fund selection database indicates some wealth managers have sought to trade in and out of the trust in recent years, based largely on changes to said premium. Others remain content to stay put and pick up the income for a while longer.
