Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.
Forwarded this email? Sign up here.
Same old story?
We’ve spoken on our last couple of podcasts about how the rise of sustainable investing is starting to transform asset allocation.
And it’s not just ESG: fund selectors’ increasingly specialised focus is leading, in some cases, to a move away from regional asset allocation in favour of funds targeting a particular niche.
But while the composition of wealth portfolios is starting to shift, the geographic structure of the strategies they hold still looks pretty familiar.
A common critique of mainstream global equity funds is that they hold too much in the US. The MSCI World index allocates 68 per cent to the States, and many global strategies more or less follow suit.
Specialist funds aren’t immune from this impulse, either. The world’s largest stock market remains a key hunting ground for a variety of the most popular thematic plays like Polar Capital Global Insurance (75 per cent in the US) or Healthcare Opps (66 per cent). Plenty of sustainable favourites, like Janus Henderson or Liontrust’s global offerings, also hold 60 per cent in the country.
There are exceptions: ESG in particular doesn’t have to mean US equity exposure, and the likes of Ninety One Global Environment have relatively low weightings.
Most wealth managers will be happy to accommodate these varying views either way. But for those who do want to diversify away from the US, only one part of the global equity universe reliably offers that opportunity.
The relative lack of yield on offer across the Atlantic means global income funds tend to have roughly 40 per cent of their portfolios in the US – a low figure by modern standards. For everyone else, it’s worth remembering that thematic portfolios can be just as geographically concentrated as their conventional peers.
The hedge edge
A familiar headline today: macro hedge funds have struggled to make the most of investment conditions year to date. After a banner year in 2020, the struggles of recent times have reasserted themselves this year for many.
Part of the problem has been the absence of surprises: as the FT notes, such strategies are designed to capitalise on market shocks, not periods of low volatility.
One other problem for many in the sector has been the petering out of the reflation trade – and the accompanying improvement in government bond prices.
Nonetheless, the average macro fund rose 2.8 per cent in the first eight months of 2021, according to the paper. More to the point, our own figures suggest the most popular hedge fund strategies favoured by DFMs, including those running macro strategies, have done better than that. Most fund selectors will be content with their choices as it stands.
Even Brevan Howard, cited as one of those to have suffered this year, and whose BH Macro investment trust slumped sharply in January, has seen a recovery in that particular strategy’s returns over recent months.
Of wealth managers’ top picks, only Neuberger Berman Uncorrelated Strategies and Dunn WMA Institutional are in the red this year. But there is one other familiar group of laggards: the multi-asset absolute return funds run by the likes of Invesco, Aviva Investors and abrdn have all continued to struggle in 2021.
For a look at how the interest in specialist funds is driving fund flows nowadays, this chart sets the scene pretty clearly. Not withstanding financial advisers’ perennial preference for multi-asset funds, it’s the global equity sector that’s driving the bulk of the retail market’s flows this year.
That will likely continue for as long as the sustainable investing surge focuses on strategies targeting particular themes.
From DFMs’ perspective, there are plenty of single-country sustainable offerings that pop-up in portfolios nowadays, too. All the same, the drive for whole-of-market exposure is unlikely to fall away any time soon.