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DFMs remain cool on closed-ended property; Will focus on gold shift as volatility continues?

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Lost property

It is hard to see a route for suspended Russian funds to re-open in the short, or maybe even medium, term. And if these suspensions seem almost indefinite, an interesting development comes from a sector now long used to the sound of shutters rising and falling.

In keeping with a trend, Janus Henderson has again suspended its UK property fund – this time because it is exploring whether to sell all the assets in the fund and it wants to stem redemptions to give this the best chance of success.

The asset manager argues uncertainty over property funds and the way they are regulated, with the question of liquidity mismatches still unresolved, has led to a substantial depletion of portfolio assets – with a clean break now looking preferable.

For most wealth clients the impact of any such manoeuvres should be minimal at most. We've mentioned before that most DFMs got out of the open-ended property funds long ago due to the frustration of price swings, the constant threat of gatings and a persistent cash drag.

But the asset class as a whole remains a niche pursuit, even when more suitable vehicles are considered.

If the property gatings did a good job of advertising the closed-ended funds, even the property trusts remain relatively sparsely held in model portfolios.

From 2021 reopening winners such as BMO's commercial property vehicle to logistics vehicles like Tritax Big Box Reit, most fail to have a substantial following. Instead, there's a long tail of holdings in the sector without many backers. The most popular property fund is LXI Reit, which is held by just five DFMs.

This perhaps speaks to the fact that many DFMs still fail to make extensive use of closed-ended funds, even in some alternative asset classes. But with good diversifiers proving hard to find, some could risk a second look.

Golden touch

One of the few obvious winners of 2022 so far has been the energy sector, which entered a bout of extreme volatility as the Ukrainian crisis causes prices to whipsaw.

That may spell big news when it comes to inflation, while also having a large influence on which funds remain in the black so far this year. Energy funds continue to make hay, as do some of the value funds within different sectors. Gold, meanwhile, has found its stride after a shabby 2021.

For DFMs, a question is how much of this buffer has made its way into model portfolios. Commodity and energy plays have remained a niche allocation. Whether selectors have piled in, or adjusted their form of exposure, could make a big difference to returns of recent weeks. See the chart below for a breakdown of commodity plays.

As readers can see, using ETFs as a play on the gold price remains the most popular form of commodity allocation. That’s arguably both good and bad: physical gold has regained its poise this year but may well lag those active funds that buy gold mining shares if the recovery continues. 

Most DFMs prefer their gold in passive form, with iShares Physical Gold ETF being the most popular, held by seven DFMs.

As of early March just a handful of these names, such as Ninety One Global Gold, had come out ahead of a physical gold ETF so far for 2022.

Last year just a smattering of wealth firms had turned to diversified energy or commodities funds, either active or passive.

With volatility at hand, some may be longing for a broader form of exposure.

Trouble at home

Back in the UK market, the current crisis has prompted action - and headlines - for the energy majors. BP declared it would walk away from its Rosneft shareholding, shortly followed by Shell making its own efforts to sever Russian ties.

Justified as they may be, such measures might be painful in the shorter term for some. BP’s shares lost ground on the back of its announcement and the financial blow of the Rosneft exit could be felt for some time to come.

And the issue is not restricted to oil majors. Mining companies such as Glencore also have exposure to Russia through various investments.

For UK equity income funds and other investors reliant on the energy and mining sectors for yield, this may be an unwelcome bump in the road.

With prices soaring, the energy sector still looks primed for further hefty returns. But this is just one example of the Ukraine crisis accelerating broader trends. The due diligence, it seems, does not stop with emerging market portfolios.


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