The trade war's tech battleground

​With global equity market movements dictated by claims and counter-claims over a possible US/China trade deal late last week, it all felt a little familiar to UK investors long since fed up with Brexit chatter. More notable is the way this discord has played out so far, and the impact it might yet have on wealth managers.

Clearly, the trade war has hurt shares on one side of the equation much more than the other. Headline index performance shows this clearly enough – and it's notable that the disconnect extends to tech stocks, too. The US tech giants have driven index growth again this year, whereas Baidu, Alibaba and Tencent have had company-specific problems compounded by their status as emerging market flagships.

As a result, Friday's talk of improving relations sent Tencent up almost 9 per cent on the day. 

A drop back this morning shows how dependent such shares remain on a resolution to the stand off between the US and China, but it seems obvious that removing this overhang would be enough to get investors interested.

Given fund managers' wish to capitalise on the latest developments in the digital economy without paying sky-high valuations, the BAT trio could have a significant impact on DFM portfolios in future.

The chart below shows exposures among some of the most popular funds among wealth managers, according to our database.

Aside from the China bears at Stewart Investors, and their former colleague Glen Finegan at Janus Henderson, most of the big emerging market players have some exposure. More surprising, perhaps, is that few global funds (other than the inevitable Scottish Mortgage) are backing the sector.

Some, such as Orbis Global Equity, have exposure via Naspers, the South African media company that owns a third of Tencent, but not many are willing to buy into the Chinese trio.  

There are signs of this changing: Hugh Sergeant of River & Mercantile said last month that the discrepancy between US and Chinese tech stocks had encouraged him to add to his positions. He's unlikely to be the only manager doing so if the disconnect persists.

Pensions shift is here to stay for wealth managers

The sight of more testing markets brings with it an additional question for wealth managers - whether the stream of new client money is going to dry up. Arguably, the answer is already clear: the growth in advisers outsourcing their investment business is easing off, and picking clients off from rivals remains fraught with difficulty.

But one structural growth driver aiding the investment industry over the past three years remains in place. The pension freedoms, and latterly the rise in defined benefit pension transfers, introduced a wave of new money looking for a home.

Transfer volumes may have reduced this year due to unscrupulous practices attracting the attention of the FCA, but statistics from the Investment Association, the latest of which were released last Thursday, continue to show the shift towards pensions cash is structural, not cyclical.

Fund flows via personal pensions have now outstripped those into Isas and unwrapped products for each of the last three years. And the gap keeps widening: for the first nine months of 2018, personal pensions on the five big fund platforms accounted for £5.8bn in net money, versus £2.4bn for Isas and unwrapped products combined.

Other statistics emphasise just how vital on-platform model portfolios have become for wealth managers in capturing this cash.

Whereas net retail fund sales stemming from advisers and DFMs directly stand at £1.7bn this year, the amount taken by platforms is some £11.7bn. The increasing prevalence of retiree cash has important implications for asset allocation, too. So we'll continue to shine a light on those models to investigate exactly how new money - and old - is being invested by DFMs in the coming months.

DFMs left ploughing their own furrow

Baillie Gifford is the latest fund firm to voice its opposition to quarterly reporting. Stuart Dunbar told FTfm this weekend that share prices are "almost an irrelevance", and quarterly reporting unnecessary. His colleague Spencer Adair, speaking to FTAdviser, was even more forthright - but did spare a thought for the agrarian economy:

Quarterly reporting is brilliant if you're a farmer. Any business where the pace in which the earth moves around the sun is relevant to its cycle should have quarterly reporting.

So put the fund firm firmly in the "against" camp, alongside the likes of Schroders, L&G, BlackRock and, as it happens, Donald Trump. 

Add to this the growing governmental focus on "patient capital" that we discussed last week, and the direction of travel looks obvious. Unfortunately for DFMs, they may be left ploughing the isolated furrow with the farmers. 

Two external factors are effectively preventing wealth managers from encouraging investors to take a longer-term view. The first is the growing number of adviser clients who expect a degree of tactical trading in order to justify their reasons for handing over the controls of their investment business to a dedicated manager. 

The second is the rule introduced earlier this year by Mifid II, requiring all clients to be notified every time there is a 10 per cent drop in their portfolio. Many such letters will have gone out last month. Quarterly reporting may eventually become a thing of the past for listed companies, but time horizons for discretionary managers keep on shrinking.