Compare and contrast

Discretionaries will be aware the UK wealth management market is very different to its continental equivalent. A new report, analysing 600 wealth and advisory portfolios around Europe, makes clear just how big that gap can be.

The BlackRock study, which analysed the state of play at the turn of the year, says the typical moderate portfolio has just 31 per cent in equities, for instance. That's far below the typical UK DFM equivalent - put this down to continental firms' relative suspicion of stocks, as well as UK wealth managers' healthy risk appetite. 

There are results that chime more clearly with domestic preferences - not unreasonably, given the report does include UK strategies in its analysis. The average number of holdings in a portfolio, at around 20, corresponds precisely with DFMs' own tendencies. 

BlackRock has also identified areas where investors might be inadvertently compromising their investment objectives. One is FX exposure - identified as "a good example of unintended risk taking". 

The study does acknowledge that currency moves have been a help rather than a hindrance to UK investors in the recent past - in contrast to the fortunes of other European investors. 

Its conclusion is that investors of all kinds should think more carefully about hedging. In the UK, however, it may be those currently offsetting currency risk who are running the greatest risk at the moment. The latest downwards shift in sterling is testing the wealth managers who say there are mainly upside risks to the pound from hereon in.

The study also notes wealth portfolios' relatively elevated cash positions, which again is in keeping with our own findings. It suggests a "liquid sleeve" of ETFs, mirroring a portfolio's overall asset allocation, may prove a wiser tactical choice. But however much discretionaries embrace ETFs, that feels like a bridge too far at the moment - for investors at home and abroad. While cash has plenty of disadvantages, wealth managers can at least be confident in how it will perform at times of crisis.

Paying dividends

UK equity income investors are pretty content at the moment. Occasional dividend cuts continue to emerge, but most fund managers are keen to reap the rewards of a market that collectively yields in excess of 4 per cent.

Clearly, higher yields increase the risk of falling into a dividend trap. That's not just a problem for the UK - the managers of the Janus Henderson International Income Trust said earlier this month that one in five listed stocks globally might fall into this category.

But there is one other reason to think UK income managers could prove particularly vulnerable. The chart below outlines the largest individual stock weightings, on average, in DFMs' favourite equity funds across the world. 

As we intimated last week, by this metric UK income strategies are more concentrated than their growth equivalents. That stands in contrast to funds in every other region, for whom the figures are remarkably consistent. 

Domestic income funds' habit of taking more single-stock risk won't necessarily come back to haunt them from a payout perspective: income giants' dividend declines tend to involve a gradual acceptance of reality rather than a sudden kitchen-sinking. 

But the stock market in general isn't always so forgiving. Income stalwarts' share prices can slump just as readily as any at any other company. At that point, supposedly lower-risk strategies' preference for greater stock concentration might come into question.

Behind the curve

A final thought on asset allocation, and a return to a piece written last month. Back then we noted that fund managers' old habits were dying very hard. Specifically their apparent refusal to countenance a further shift downwards in bond yields, despite government bond yields having declined markedly in recent weeks.

So it was that just one in 25 managers thought benchmark Treasury yields falling below 2 per cent was the most likely outcome over the next year. That was five times lower than the proportion who thought yields would reach 3 per cent over the same period (the remainder opted for the apparent safety of somewhere in between the two).

Yet here we are, a month later, and Treasuries rates have indeed plumbed new depths. It would be hard to find a more obvious example of how the investment consensus can so quickly go awry.