Asset AllocatorSep 1 2021

Looking past the summer's fragile equilibrium; Weighing up the R word for riskier equity funds

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Behind the scenes

What’s happened while we were away? In the world of fund management, some familiar topics – disclosure, liquidity – have again reared their heads as a reminder of the need for due diligence. Aside from that, August was mostly as quiet as its reputation would suggest. But the fragile equilibrium may not last for long.

In markets, worries over inflation continue to vie with concerns over the strength of the economic recovery, with stalemate the result for now. In that context it’s no surprise that the Fed’s big Jackson Hole speech was ultimately a damp squib, taper talk having been shelved again.

That means a nervous serenity has continued to hold sway. There’s little sign of drama from credit spreads, US indices continue to reach new peaks, and they're now being joined by European benchmarks enjoying a run of their own at long last (European monetary policy could yet become interesting sooner than some suspect).

But at the moment, it’s a case of constructing arguments. Those who’re bullish can stick with the TINA narrative: cyclical trades may have cooled but there’s little interest in wholesale moves away from equities.

Those with less appetite for risk can point to bets against the Ark Innovation ETF hitting a record high – though this arguably has as much to do with the active ETF’s rapid rise to prominence as anything else.

All the same, DFMs aren’t asleep at the wheel. They’ll be aware that as senior managers return to their desks – wherever those desks may be located – things could start to get interesting very quickly. We’ll be taking a closer look at some of the big autumn issues for wealth managers in the days and weeks ahead.

Reassessing risk

For Chinese equity investors, August was about dealing with the fallout from July’s crackdown. Then last week investors began speaking of a different R word, as worries over regulation were briefly swapped for talk of a stock market rebound.

Ark was again involved, as were retail investors piling into the tech-centric KraneShares CSI China Internet ETF.

But the likes of Tencent remain down 30 per cent year to date, and some have washed their hands. Our asset allocation database shows some wealth managers have divested their dedicated China exposures in recent months – quite the step change after several years in which positions have gradually been increased.

Certain global equity managers have done the same: Artemis Global Select manager Simon Edelsten now has less than 1 per cent in the country, and sees “uncomfortable parallels” between China’s present moment and the 1998 Asian financial crisis.

Not all those with hefty Chinese tech exposures have struggled of late: broker Stifel notes that the JPM Emerging Markets investment trust has seen its NAV rise by 1 per cent since June.

Yet Edelsten isn't alone in thinking EM funds in general are overexposed to Chinese equities due to benchmark requirements.

A variation on this argument was made in another quarter last month: the BlackRock Investment Institute said China should now be treated as distinct from the wider emerging markets.

But that call was made for altogether more positive reasons: BlackRock thinks China should no longer be considered an emerging market, and its position in portfolios should be ramped up as a result.

Economically speaking, the former stance will make sense to most wealth managers. But the latter will divide opinion, to say the least, while the country’s equity markets remain as volatile as they do.

Outsourcing in vogue

Anecdotally, some wealth managers have reported renewed interest in investment outsourcing of late. After a couple of years in which the overall pie wasn’t growing that much, are more advisers taking the plunge and turning to external DFMs for the first time?

If so, they’re not alone in that impulse. The FT notes that difficult investment markets mean that institutions are also now looking for someone to take portfolio management off their hands. Many of the arguments in favour of using an ‘OCIO’ will look strangely familiar to discretionary managers and their clients: this is one area in which wealth firms might ultimately be seen as trailblazers.