Dan Jones  

Changing the status quo

Dan Jones

Advisers who spied reasons for optimism at the end of a rough 2018 for their investments will feel vindicated by a buoyant January. But there remains the mystery of what might work for portfolios in the rest of 2019.

Natixis Investment Managers has assembled outlooks from a variety of different fund managers in a bid to identify consensus bets – and compared these with the same managers’ positioning in late 2017. It’s no shock that providers were more downbeat at the end of 2018 than the beginning. Managers are less bullish on Japan, emerging market debt, European and EM equities now.


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And agreement is hard to find. Despite interest having fallen since last year, EM stocks (alongside US equities) now rank as the asset class with the most positive views. Even then, this proportion – around 45 per cent – is outweighed by those who are negative or neutral.

But caution comes with its own risks. US high yield was the asset class on which the most fund managers were bearish. Yet junk bonds have again surprised the doubters in the past few weeks.

It’s hard to blame strategists for not being able to call short-term price moves, but there is one area where providers look more negligent. The research suggests they aren’t thinking carefully enough about the way in which clients allocate assets.

None of the 20-plus outlooks talked about hedging costs, despite the growing impact that global interest rate differentials are having on returns. The cost of buying US Treasuries nowadays, for example, is rather different to what it was prior to the Federal Reserve’s series of rate hikes.

As Natixis notes: “Asset allocation for a dollar-based investor should look different from a [non-dollar] based investor”. A one-size-fits-all approach to a global client base may be the easiest answer for fund firms, but it tempers their forecasts’ value for UK (and other) intermediaries.

These kind of oversights are more important nowadays, because fund managers are having to work harder to make themselves matter to their customers. Baillie Gifford manager Tom Coutts argued last month that the gravy train for asset managers has started to stutter. “Peak gravy” (his words) is here, and fund groups are going to have to think harder about how they charge clients.

Mr Coutts’ suggested solution is to erase memories of hedge funds’ ‘two-and-twenty’ model via a new norm; “something closer to point-two-and-twenty”. The idea is for all funds to levy ultra-low fixed charges and supplement them with a sliding performance fee.

The problem, from advisers’ perspective, is that most aren’t looking to change the way they pay for products. Innovation, from this perspective, often translates into little more than added complexity.

The above suggestion is vaguely similar to the fulcrum fee share classes introduced on a handful of Fidelity’s UK-based funds last year. True enough, that charging model attracted criticism for being overly complex – though lowering fixed fees to a starting point of 0.2 per cent, as Mr Coutts suggests, might help smooth over concerns.