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Asset Allocator

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Wealth firms' internal affairs leave room for manoeuvre; Funds' great stimulus hope

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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Internal affairs

Amid all the consolidation activity going on around the industry, there's still the odd sign that vertical integration is on the wane when it comes to DFMs. But wealth firms are naturally still keen to use internal resources where possible. And this isn’t restricted to leaning on stock-picking teams: a decent number also make use of their own or their parent company's funds, in one form or other.

That's one way to more effectively monitor both holdings and costs – though the strategy does still have its doubters. To gauge how prevalent the practice is, we’ve examined how heavily moderate model portfolios in our database relied on internal products at the end of Q1. The results are below:

It's clear that exposures are, on the whole, relatively low. By the same token, while the above is a small sample, it's worth noting that almost every firm with in-house capabilities has made use of them in some form. 

The only anomaly comes in the form of Investec Wealth, which has no exposure to Investec Asset Management’s funds. This chimes with its parent firm’s view that there are "limited synergies" from a vertically integrated approach.

Gam, in contrast, has taken advantage of its asset management arm and sits at the right of the chart: its exposure approaches 30 per cent of its Balanced portfolio.

For those without such resources, the presence of such funds serves to increase competitive pressures - though not all turning in-house will reduce charges for end investors. Sceptics may remain, but with the FCA long ago giving such practices a pretty clean bill of health, most DFMs' in-house holdings have plenty of scope to creep higher still in the coming years.

A new Europe?

Christine Lagarde’s nomination to the top role at the European Central Bank has been welcomed by investors already anxious for another round of monetary easing. 

While widely seen as a continuity candidate, Ms Lagarde’s lack of monetary policy background has produced differing views on the extent of her dovishness: Legg Mason’s Michael Browne doesn’t expect her to be radical, but Franklin Templeton’s David Zahn says the former IMF head won’t have “any pre-conceptions about what monetary policy should look like and will be largely unconstrained to pursue more adventurous forms of easing.”

Either way, a commitment to looser policy of some kind looks baked in. Arguably more significant is how the question of fiscal policy is treated. The sense is that the would-be president has strengths that may play better on this side of things.

Mario Draghi’s repeated calls for more stimulus from member states has been met with familiar scepticism from Germany in particular. But it remains the missing piece of the puzzle for many investors. Several fund groups are therefore focusing more on Ms Lagarde’s political qualities than her view on specific easing policies.

Maya Bhandari at Threadneedle says the prospective eight-year tenure “may place greater emphasis on areas like fiscal coordination and a banking union”. Aberdeen Standard Investments economist Paul Diggle notes that European politicians are “nominating someone whose particular skillset will be trying to get them to do things that they clearly don’t want to do”.

Here, too, there is the odd cautionary voice. Few fund or wealth managers will be under any illusions about the difficulty of changing politicians’ minds on this front. But Brandywine’s Francis Scotland asks whether the new president’s own stance may prove slightly different: “Ms Lagarde rode the helm of an organisation charged with imposing fiscal sobriety on countries in exchange for bailouts.  She might turn out to be a foil for the modern monetary theorists advocating relentless government spending be financed by printing money."

Many would characterise the above position as pragmatic, and one that might still allow for some cajoling on fiscal positions. But if those negotiations aren’t successful, fund selectors might remain relatively reticent to back European corporates and the managers who own them.

Backing the back office

This morning's announcement that a trio of fund firms have taken a stake in platform and Sipp provider Embark is another example of asset managers getting creative in a bid to stay relevant. 

It's not quite vertical integration just yet - the combined stake is just under 20 per cent, and doesn't come with board representation or the like. But as with Invesco's purchase of Intelliflo, it indicates that behind-the-scenes capabilities are on minds as much as buying up distribution or advice businesses.

As we discussed last month, Intelliflo's latest offering has the potential to be a competitive threat to DFMs. Embark is slightly different, but some think its white-label platform offering might become a big thing for advisers in future. That in turn could have implications for on-platform model portfolios. Wealth managers are having to join a more complicated series of dots to establish exactly where they rank in the pecking order nowadays.

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