Asset allocation alterations

To add to the variety of fund switches we discussed last week, today we're running the rule over some notable new paths being forged on the asset allocation front.

There's clearly an industry consensus on certain asset classes - cutting Europe and adding to emerging markets being the most common shifts - but a divide has emerged elsewhere.

That's reflective of what's perhaps the trickiest asset allocation decision of the moment: weighing up the relative merits of US assets.

Slumping stocks provided some with a rationale for diversification. Quilter Cheviot’s MPS team cut back its long-standing overweight in US equities, for instance. But for Investec Wealth the falls were reason to add back to its US exposure. And a third group sought to spread their existing US equity weightings across a wider range of styles in a bid to combat trickier markets.

Nor has there been much agreement on how to deal with tactical bets. Quilter's equity reduction helped fund a position in unhedged US Treasuries, but at Bordier the team quickly sold their exposure to the Vanguard US Government Bond fund once yields started to drop back from their late-November highs. That money went straight to cash.

Keeping powder dry was a relatively common tactic; David Coombs, head of multi-asset investments at Rathbones, was already holding substantial levels of cash, but even he was reluctant to put this to work at the end of last year.

Many of our equity holdings are those companies which have performed well over a number of years….these names can be the first sold by investors when sentiment sours as generally it feels more comfortable to take profits when raising cash rather than sell down losers in a portfolio.

Given that caution, the manager's cash position remained in excess of 20 per cent as of the turn of the year. It's still too early to say whose decisions will help them cash in for the remainder of 2019.

Name and shame

The investment industry could be forgiven for thinking the regulator’s asset management market study had been and gone, so long ago were its initial findings. More than two years after its first report, the FCA came out with another batch of rules yesterday following its final consultation.

The changes are effectively a rubber stamping of those consultation proposals, and focus on one area in particular: benchmarks. For instance: fund providers will have to show past performance against all indices if they use more than one benchmark, and explain how performance is assessed in cases where there’s no benchmark at all.

The watchdog doesn’t think its guidance should increase costs for fund firms, which underlines that these alterations are relatively minor. But the interest in benchmarks is consistent with its growing scrutiny of “closet tracker” funds.

For DFMs, that’s not really an issue. Our data has shown that the active share of their fund selections is consistently in advance of industry averages. 

Performance, too, outstrips the typical fund, according to data we crunched last year. We’ll shortly be updating that to assess how DFM picks fared over the course of 2018 as a whole.

Of more immediate relevance for wealth managers is the confirmation that the FCA is homing in on descriptions, labelling and the need for clarity when communicating with investors. It’s already warned that model portfolio naming standards may be giving clients the wrong idea. 

Of late, we’ve observed DFMs ditch their more esoteric approach to labelling in favour of falling back on long-established terms like “balanced” and “cautious”. The irony is that these are the very names with which the regulator’s found fault - because clients may struggle to distinguish between the two. 

So, at a time when many discretionaries are taking more risk than their multi-asset peers, yesterday’s rules are another sign they should think more carefully about these blurred lines - not least with the final report of its platform market study due in the coming weeks.

Gross out

They say it's better to burn out than fade away, but not many get to do both. For Bill Gross, the fireworks that accompanied his departure from Pimco in 2014 were quickly replaced by a struggle to garner assets at his new firm - and his retirement ends what's been a quiet postscript to a high-profile career.

Mr Gross's role for UK investors has long since been as a thinker rather than a manager of money. His unconstrained bond fund isn't held by a single MPS tracked by our database, but the eccentric investment outlooks have, if nothing else, consistently stood out from the crowd.

And if his work at Pimco was symbolic of the bond bull run, it's perhaps what happened afterwards that was of most use to DFMs.

The company's liquidation of billions of dollars worth of fixed income assets - to meet the massive outflows that accompanied his departure - was achieved with barely a hiccup in bond markets. The fireworks - or nitroglycerine, as Mr Gross might prefer - simply didn't set off. That went a long way to help calm fears about bond market liquidity, and the example may yet come in handy for the arguments of the future.