Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs. We know you're bombarded with information, so each day we'll be sifting through the mass to bring you what you need to know, backed up by exclusive data and research.
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Mifid II annual disclosures, coupled with a 2018 that left more or less everyone worse off, mean DFM performance is being examined very closely at the moment. That can result in difficult conversations with clients - particularly when benchmark quirks are factored in.
We’ve parsed our MPS database to gauge the recent performance of different Balanced model portfolios. The figures encompass the year to March 31, so do at least make for better reading than those produced three months earlier. But note, in the chart below, the inclusion of two touchstones - the Arc peer group and the MSCI WMA Balanced index.
With investment managers relatively free to pick and choose benchmarks, many now choose outcome-based targets like CPI plus a few percentage points. A couple opt for the Arc measurement of DFMs' collective performance as their yardstick. But the majority stick with the WMA index, and that has repeatedly proven a much harder gauge to beat.
Why the disparity between the two standards? The WMA’s shake-up of its indices in 2017 meant a shift towards alternatives, and some forms of fixed income, that have been correlated with equities in recent times. That means more cautious discretionaries may be destined to lag when equities are in vogue - and yet there are only isolated examples of wealth managers turning away from the WMA standards.
On the fixed income front, there's also the usual issue with interest rate risk. At a time when bonds have again done better than most expected, wealth managers' structural underweight to duration has left them trailing more traditional portfolios. Vanguard's LifeStrategy 60% Equity fund, which has a long-duration bias of its own, recorded a similar return to the WMA index.
So while DFMs are perfectly justified in making these decisions, many are still faced with the need to explain to clients why they're lagging their own benchmarks.
Yesterday, in light of the latest trade war concerns, we looked at European funds' exposure to Chinese revenue streams. Those trade worries increased on Monday with the news of retaliatory tariffs from Beijing on US goods.
But while wealth managers will be alive to the specific threats facing certain portfolios and companies, they'll also be conscious of the overall threat to sentiment. And on that front it may be worth watching the renminbi as much as the political headlines.
Kit Juckes, chief FX strategist at SocGen, has been pressing this point for a while now. He labels the yuan as "the world's most important currency", and last Thursday described it as the "anchor of stability for all markets". That theory was given added credence yesterday, when the renminbi fell 1 per cent to its lowest level since December. US shares subsequently suffered their worst day of the year, with tech particularly badly hit: 101 stocks in the Nasdaq 100 ended the day down.
Yet the rise in volatility must be set in the context of the past few months, and that doesn't suggest a quick resolution is on the horizon. JPMorgan Asset Management strategist Kerry Craig told the FT that markets' serene progress this year might mean US policymakers are content to ignore volatility in the short term.
For now, the impact on DFMs and their clients is muted; it will take more than one down day to rattle discretionaries. At the moment, the consequences are more serious for their inboxes than for their investors: the S&P's most recent intraday peak was reached on May 1. If that holds it would consign the industry to an even greater surfeit of "should you sell in May and go away?" in the years to come.
Cut it out
Worries over dividend cuts have been prevalent in the UK market for a long time now - no surprise when multiple stocks continue to yield more than 6 per cent - but there's still little evidence of a mass cull on the horizon. True, today has seen Vodafone cut its payout by 40 per cent, but it remains an isolated case, and the shares will still produce a healthy yield.
So despite more fund managers than ever before urging corporates to prioritise reinvestment over dividends, companies know the punishment that awaits them from yield-hungry investors if they abandon their payouts entirely.
Witness Centrica yesterday, which surprised some observers by stubbornly ignoring the alarm bell that is a 12 per cent plus dividend yield. Firms like these are undoubtedly storing up problems for the future. But the structural incentives to maintain a payout of some kind should ensure the UK remains a happy hunting ground for dividends for the foreseeable future.