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Reining it in?
It’s been quite the year for long/short funds – or for those running hedge fund structures, at least. The sight of US funds’ short bets being unravelled by an army of retail traders was swiftly followed by the high-profile collapse of the hitherto-unknown Archegos. When the dust settled, it turned out hedge funds had nonetheless posted their best start to the year since the financial crisis.
But strong average returns did mask a number of poorer performers, and funds then had to contend with a different kind of equity market rotation, as value’s brief supremacy over growth gave way to a more balanced state of affairs in the second quarter.
When it comes to the Ucits long/short funds favoured by wealth portfolios, things have proven a little calmer. But there are some common trends to note from the way that these funds’ holdings have shifted since the start of the year.
The chart below shows changes in net exposures for a selection of the UK long/short portfolios. Compare these with the shifts seen in Q4 last year, and the picture is much more nuanced.
Back then, most managers upped both net and gross exposures, partly to take advantage of the ongoing market rally. A little more caution is evident this time around - though there are a couple of caveats here.
The first is that the changes to Jupiter Absolute Return are due to the departure of James Clunie and arrival of Talib Sheikh, rather than a separate change of heart of positioning.
The second is that gross exposures (not pictured on the chart) have again risen en masse. Every fund listed upped its gross exposure over the first half of 2021, and only two now have exposures of less than 100 per cent. That suggests a certain appetite for risk is still present among most of this cohort.
Convertible bonds have enjoyed some time in the sun again in 2021, but not all funds in the space are doing likewise.
The rush to issue convertible debt took off at the start of the year in particular: $34bn was raised by companies in January and February, the highest amount since Refinitiv records began in 1980 and a 68 per cent increase year on year.
That, coupled with healthy performance in 2020, has helped such debt go mainstream – or at least mainstream in the business world: an article in the Economist earlier this month described convertibles as the “asset class for the times”. The publication notes that the bonds’ option to convert to equity “affords the bondholder a degree of indexation to rising consumer prices”.
Unfortunately, things don’t always play out so simply. While issuance has remained at elevated levels, the prices of some of the highest profile bonds dropped back in line with growth-sensitive equities this spring.
Nor is inflation protection guaranteed. RWC’s convertibles team are among those to have noted that the bonds are “perhaps more sensitive to inflation fears than the broader equity market”, due to the relatively high proportion of growth-focused names.
The managers say this sensitivity is “less today than it has been historically”, but they themselves have found going tough of late. After outstripping almost every other convertibles strategy in recent years, the fund has fallen 6 per cent in 2021, according to FE data. That’s a short-term outcome, but given its popularity with DFMs – many of whom have had exposure for several years of plenty – some wealth managers might wonder if the asset class has already had its moment.
A clearing of the decks today, as management teams signed off on some big M&A decisions ahead of August downtime. Lloyds’ deal for Embark slightly overshadowed Raymond James’s proposed acquisition of Charles Stanley, but both are significant in their own ways for the sector.
Embark has itself been a consolidator of services in recent years, and its arrival in the Lloyds stable creates a patchwork of relationships that also involves Scottish Widows and a part of Schroders Personal Wealth, among other things. Raymond James’s deal for Charles Stanley is further evidence that amalgamation is seen as the way forward, however tough it may prove in practice.
But there’s also a third deal mooted today: tech provider Iress has rebuffed a takeover offer from private equity. PE’s appetite for all things wealth management has become increasingly voracious of late. They, like others, haven’t failed to notice that tech could be the next big gamechanger for the retail investment world.