Brief: Some of the biggest money managers are vexed by the same paradox troubling everyone else: U.S. stocks are near an all-time high, but the world still seems to be falling apart. Any number of looming threats could bring the historic rally in U.S. equities to a screeching halt, top hedge fund and mutual fund managers said. They include uncertainty over school re-openings, the November elections, tensions with China and the effect of monetary policy on inflation. While the S&P 500 has surged more than 50% from its March low, that happened with unemployment in double digits and the federal government struggling to contain Covid-19. The equity rally also has lifted the index’s price-to-earnings ratio to 26, compared with an average of 18 over the past decade. All of this leaves some market insiders wary of calling this a recovery. “There’s this massive disconnect between fundamentals and markets,” said Brian Payne, investment officer at the Teachers’ Retirement System of Illinois. “There’s just too much capital chasing investments, the Fed is flooding markets and that leverage isn’t going to the real economy. As we approach the election and concerns over a ‘blue sweep’ grow, that could be the inflection point where people’s bullish sentiment turns bearish.” Chris Rokos’s multibillion-dollar hedge fund is modestly bullish in the short-term but sees volatility ahead, as the market underestimates the potential for bigger moves over the next couple of months.
Brief: UBS Group AG is overhauling the legal structure at its key wealth management unit in a move that will cut costs and free up billions of dollars for lending in higher-growth markets. The project -- known as Rigi after a famous Swiss peak -- will see the bank transfer large customer deposits out of its Swiss entity into the bank’s main UBS AG legal unit, people familiar with the matter said, asking not to be identified as the plans are private. The change will allow the bank to boost loans outside Switzerland, the people said. Rigi partially rolls back measures from the 2008 financial crisis, when Switzerland told UBS to create separate legal entities that would be insulated in the event of a surprise bankruptcy. Moving the deposits would help the bank toward its target of lending between $20 billion and $30 billion a year to wealthy clients outside its home market, the people said. “We are making changes to our legal entity structure in order to improve the overall efficiency of the Group,” a UBS spokesperson said in an emailed statement… In the aftermath of the financial crisis, UBS wealth-management clients who held their money in Switzerland, even if they lived elsewhere, had their funds placed at the bank’s ringfenced local entity. Most international clients with deposits in Switzerland will now be under UBS AG. That will spread deposits more evenly throughout the group and is said to satisfy regulators, one of the people said.
Brief: For the first time in years, the plurality of investors plan to put more money in hedge funds, not less. Forty-four percent of hedge fund investors surveyed by Preqin in June said they intended to increase their commitments to hedge funds over the next year — nearly double the proportion from a year ago. This group far outweighs the 28 percent intending to downsize their hedge fund allocations. These findings mark a sharp change from the last four years, when investors were more likely to lower their hedge fund allocations than raise them. “Volatile markets have increased appetite for hedge funds,” Preqin said in its mid-year report on alternative assets. But nearly half of surveyed investors were disappointed by their hedge fund managers’ performance over the last year. Forty-seven percent said their portfolios had performed worse than expected, while just 6 percent reported exceeding them. Despite this, investors were more optimistic about hedge funds than they were about any other alternative asset class. Thirty-nine percent predicted that hedge funds would perform better over the next year, compared to 28 percent who thought hedge funds would perform worse.
Brief: Financial advisors have been more involved in managing client portfolios since the spread of the Covid-19 pandemic, according to a new report, even though most probably shouldn’t be. The average team potentially capable of creating custom portfolios for clients has an average of nine people and those practices are often supported by a centralized investment group, according to Cerulli. The majority of wealth management practices lack the personnel to properly manage investment portfolios. More than half of all practices, or 55%, rely on their own investment research and portfolio or model construction. But only an estimated 7% are capable of doing that effectively, according to Cerulli Associates, a Boston-based research and consulting firm. TAMPs, or turnkey asset management platforms, which help wealth managers outsource some or all of their investment management responsibilities, have been (albeit, self-servingly) railing against ill-equipped advisors managing portfolios. “That is not where the business is going. And TAMPs are here to really make the advisors way more valuable to the end client, to the investor,” AssetMark CEO Charles Goldman told RIA Intel about the busy but little-known corner of financial services. But a new survey published Wednesday suggests that advisors are generally not heeding the recommendations of researchers and others. Some are relying even less on third-party model portfolios this year.
Brief: Giant fund house Baillie Gifford saw its highest ever monthly inflows last month as investors piled nearly £1bn into its funds. Morningstar data, published yesterday (August 18), showed £991m was funnelled into Baillie Gifford throughout July in a sign its growth oriented house-style remained in favour with investors. Within their respective categories, many Baillie Gifford funds were among the very top sellers in the month too, as the asset manager’s popularity continued to grow. Philip Milton, chartered wealth manager at Philip J Milton & Company, said the firm’s popularity stemmed from the fact it had called the performance of US tech investments “so right”. He said: “It’s quite easy really. They are to be congratulated, though they are riding the ever extending index and it becomes more dangerous with every point.” Baillie Gifford was an early investor in US technology companies, backing the likes of Tesla, Amazon, Netflix and Alphabet (Google’s parent company) through a number of its funds. Such companies have boomed in the past few years and, more recently, thrived during the coronavirus-induced lockdown while other companies took a beating.
Brief: The convertible bond market is “quietly thriving” in the aftermath of the market shock brought about by the coronavirus crisis, says Man GLG, the long-running discretionary hedge fund management unit of Man Group. Convertibles’ primary market has seen record levels of new issuance this year – particularly in the US - with many first-time issuers entering the fray, while at the same time the asset has cheapened to levels not seen for some years, Man GLG said in a commentary this week. This flurry of activity offers investors “a potentially attractive entry point” into the market, boosting convertible bonds and broadening the opportunity set, according to Danilo Rippa, Man GLG’s head of multi-strategy credit and convertibles, and analyst Chris Smith. After the coronavirus crisis tore through global financial markets, converts are now seen to offer downside risk mitigation, a cheap entry point and improving liquidity, they said. Man GLG’s research noted that during the Q1 market meltdown, global convertibles fell 15.6 per cent, while global equities plummeted 33.6 per cent, with the decline in global convertibles equating to 46.5 per cent the fall in global equities. The subsequent market rally in Q2 saw global convertibles advance 17.5 per cent, as global equities surged 37.5 per cent. As a result, global convertibles were able to capture 46.7 per cent of the move higher in equities.