Fund selection pre and post Brexit

14 July 2016
By Tiziano Giannotti

By Fiona Maciver

In light of the tumultuous events of recent weeks, it may not seem like the most obvious time to consider the latest data on fund buyers’ holding periods and future asset allocation intentions Although their views maybe influenced a little by the fallout from Brexit, we do not yet have cause to believe it will detract substantially from their long-term outlook. Even before this monumental decision, investors were notably wary of risk, having already been stung by several bouts of market upheaval in the last year – this is already reflected in fund buyers’ longer-term asset allocation intentions as well as the continued extensions to average fund holding periods, through the increasing use of model portfolio solutions.

• Average fund holding periods have trended up over the last three years, particularly in retail distribution channels.

• Absolute return and alternative sectors most in demand for allocations over the next 12 months.

Holding periods – how sticky are assets?

The industry remains on a lengthy mission to promote the benefits of long-term investment. Naturally, the reasons for selecting and de-selecting a fund are dependent on a number of variables and some asset classes are more susceptible to frequent changes in the direction and volume of flows than others. Setting aside underperformance of funds and shifts in asset allocation, professional fund buyers have indicated to Fund Buyer Focus that, on average, they are holding funds for longer now than three years ago. The chart on the right highlights the aggregated changes in holding periods across European retail distribution channels for the period between April 2014 and April 2016. Overall, fund holding periods moved up from an average of 32 months across all distribution channels to 38 months. Digging beneath the surface reveals some interesting trends with the biggest upswings to be found in the more retail-oriented distribution channels including retail banks, IFAs and advisory managers.

Fund Holding

This is in part a reflection of the increased sales of model portfolio solutions such as mixed assets against a backdrop of investors eagerly trying to achieve low-risk returns in a very uncertain world. Added to this, the increased costs of doing business and the removal of retrocessions in markets such as the UK and the Netherlands have provided additional support for longer holding periods. For example, the big banking groups in the Netherlands are using more model portfolio solutions to keep costs down. In the UK, which is dominated by the IFA channel, the ban on retrocessions triggered a review of business models with many advisers opting to outsource investment decisions to discretionary managers and, again, model portfolios – freeing up time and resources to manage client relationships. Also, with the focus on costs and the loss of the retrocession, advisers are no longer incentivized to switch clients’ money without a sound reason for doing so. Given the longer-term nature of insurance product wrappers, this channel continues to display the longest holding periods. While insurers offer potentially stickier assets with the longevity of products, this is arguably the most difficult type of distributor to take on with a lengthy business development and screening process. At the other end of the spectrum, not surprisingly, with a focus on portfolio construction and sourcing investment components, discretionary managers and funds of funds generally have shorter holding periods, which has business-stickiness implications for managers focusing on these. Across all channels, the holding of investments is heavily influenced by performance and clients’ investment objectives. For asset managers to reap the benefits of clients willing to take a longer-term view, they must deliver expected outcomes on investment returns and provide clear communications. The current environment is a major test for mixed assets and managed portfolio solutions in particular as they are adopted by more and more investors.

ASSET ALLOCATION TRENDS

When we last looked at allocation trends in December 2015, alternative solutions were at the top of buyers’ shopping lists, highlighting both selectors’ and investors’ desire to manage risk through uncorrelated returns. Not surprisingly, even pre-Brexit, nervousness over the prospects for the global economy and the quest for positive investment returns continued to feed an appetite for alternatives as confirmed in the latest update from Fund Buyer Focus on the future asset allocation intentions of professional fund buyers. Conveying a similar theme, absolute returns nudged ahead of alternatives to take the top spot according to the 227 interviews conducted between 01/02/2016 and 30/04/2016.

Asset allocation

Asset managers most likely to receive business in this sector are ranked by Fund Buyer Focus based on distributors’ responses to the question: ‘Who are your three main third-party retail fund providers for the named asset classes?‘ As can be seen in the table to the right, Standard Life Investments tops the most recent rankings, with the firm’s flagship GARS fund helping to build a formidable reputation in this competitive arena. However, recent performance issues may take their toll on the company’s ranking, at least in the short term. The list of equity sectors in line for increased allocations was topped by thematic funds followed by Asia (ex Japan), European, emerging, and global equities. Of course, the latest allocation intentions data from Fund Buyer Focus come with the caveat that they were sourced from fund buyer interviews conducted over the three months to April. A lot has happened since then and we have witnessed a highly volatile few weeks following the Brexit vote.