Less is more

Big market moves don’t always spell portfolio churn: as we've noted before, DFMs' reaction is often to stand back and take stock. But there are signs that recent events have muddied the line between strategic and tactical asset allocation.

In many ways, model portfolios are a special case. Risk ratings mean overall allocations are pretty tightly defined, which in the past has led discretionaries to shy away from major shifts. Tinkering isn't always helpful, either: changes represent a taxable event, and some wealth managers say the practice of quarterly rebalancing is also being challenged by Mifid II rules. 

Tacit Investment Management CIO Raj Basra, for example, says of his thinking:

Most of the industry tends to work to monthly and quarterly rebalancing and investment committees. But turnover has costs which nobody sees that are now starting to show up in Mifid II disclosures. The less you can trade for people, the better, and the more sizeable trades you can do [when you do make changes].

That might mean that strategic, rather than tactical, asset allocation changes become more common at times of volatility. Tacit turned over a third of its Steady Growth portfolio late last year, backing emerging markets and UK stocks at the expense of US equities. That was the first change in a year for a firm that tends to only change asset allocation every 18 months, in an effort to run winners and limit costs.

For now, time horizons remain long-term in nature. AJ Bell has also recently made several changes to portfolios, as part of an annual process. Head of active portfolios Ryan Hughes contrasts a strategic time horizon of five to 10 years with tactical asset allocation that takes a one to three-year view. But balancing the need to remain nimble with the need to avoid churn might become an increasingly pressing issue as 2019 progresses.

For those using unitised portfolios, the equation is slightly simpler: one wealth manager who wished to remain anonymous acknowledged that multi-asset funds have more freedom to trade, given the lack of tax implications. That could yet be another impetus for more firms to turn back to unitised offerings.

Safe for now

The FCA may have proposed banning platform exit fees, but it’s given a stay of execution to model portfolio practices. The findings from its investment platforms market study, published this morning, pull back from the suggestions made in the interim report.

Last year the FCA said it might enforce risk and performance disclosure requirements, and standardised terminology, to help consumers better compare models. Today, it’s happy to wait and see for a while longer.

There are three reasons for this delay. The first is relatively minor: MPS structured as unitised offerings are about to be subject to the changes imposed by the separate asset management market study. Those rules introduce a degree of standardisation on issues such as benchmark disclosures.

The second motive illustrates how the regulator's thinking shifts a little when advised customers are involved. The FCA says that because “the amount invested in non-advised discretionary services remains only a small fraction of the model portfolio market…we think there is currently limited scope for harm”. 

So DFMs, whose models are increasingly used by advised clients, will be reassured that the regulator thinks this structure has a certain degree of built-in protection for consumers.

But the third reason that further work has been delayed will give pause for thought. As most predicted, the final report has acknowledged that the FCA’s previous comments on platforms’ own MPS are applicable to the wider model portfolio market. Now it’s starting to join the dots with other work, too: it states that its forthcoming review of RDR “will explore discretionary services further”.

This phrasing relates specifically to models, rather than the discretionary fund management community in general. But given the increasingly prominent role that MPS play in wealth firms’ growth plans, that’s not to be sniffed at - and this next look at the space will do much more than just consider “labelling” issues. Wealth managers have gained a short-term reprieve at the expense of greater scrutiny heading their way later this year.

Warning shots

Another sign that all is not well, despite the equity market rally, comes from the fixed income market. 

The headlines have been about US Treasury yields falling back towards the 2.5 per cent mark, but it’s not just US government bond yields that have dropped.

The amount of negative yielding debt has been rising consistently since the start of October, and has now breached the $9trn mark for the first time since 2017.

Shares saying one thing and bonds another isn’t a new phenomenon, of course, but there’s little puzzle in the minds of most observers this time around. Most are convinced that it’s fixed income investors who are right - to an extent. 

The consensus is that global growth is slowing, but at the same time predictions of recession are still far from the norm. Either way, an exit date from the once-unthinkable world of negative bond yields is receding further into the distance.