Upside, down

It isn’t just negative yields and inverted yield curves that are turning things upside down for investors this summer: market movements are out of kilter in more ways than one at the moment. And discretionaries are having to deal with some inversions in their own corner of the investment universe, too.

So while the focus remains on the government bond rally and what it means for the health of both the US and global economies, there are still some conflicting signals out there.

The most obvious is the relative resilience, once again, of equity markets. But conditions on the ground are also up for debate.

In the US, where yield curve activity is raising eyebrows about economic fortunes, there are indications that things aren’t that bad. Americans’ collective view of the current state of the economy reached its most optimistic level in 19 years this month. Useful corrective or end-of-cycle overconfidence? As ever, there’s more than one way to interpret the data.

For wealth managers, the contradictory or upside down phenomena don’t end there. Their own benchmarks are also telling them something a little unusual. Risk assets’ latest dip mean the WMA Private Investor indices are again off balance: though both are in positive territory, the Conservative index is again ahead of the Growth benchmark on a 12-month view. 

This, of course, is in no small part due to the fierce sell-off seen in the final quarter of 2018. But it also points to the uneasy equilibrium being maintained by markets so far this year.

Even longer-term time horizons are starting to tell a similar story: there is barely a percentage point between the five-year returns of the Conservative, Balanced, Income and Growth indices as it stands. A September shake-out may or may not be on the cards, but equally there’s little to suggest things are going to return to normal any time soon.

Go with the flow

July and August never feel like a good time to make big strategic changes, even in a year when various parts of the market appear to be coming unstuck. 

Our analysis of DFM portfolios suggests this year is no different - though, as we’ll discuss in more detail next week, there are still some notable tactics being deployed.

But it’s not just the summer that has been defined by stasis. Look at fund flow figures and it’s clear that things have been much the same for many a month. We’ve previously highlighted just how few funds now manage to attract meaningful interest from buyers. And new data from Morningstar emphasises a similar point: 

For the most part, fund groups that attracted assets over the past 12 months continued to do so in July. Similarly, those fund groups that lost assets over the past 12 months also had a net outflow in July. This trend of momentum in flows was experienced by 77 of the 99 fund groups that reported flow data for three or more funds in July.

The logic is sound enough: for all the unease, allocations that have worked in recent times will still be doing relatively well this summer. US equities and credit remain the go-to positions for many a discretionary.

On top of that, the major rally of the past 12 months has taken place in the one asset class - sovereign debt - still viewed with scepticism by a majority of buyers. And is not one that lends itself to standout fund strategies in any case.

No surprise, then, that fund firms are finding it hard for different offerings to gain traction. Those groups may not wish for an upswing in volatility any more than the next investor, but ultimately it might only be this that convinces selectors to change tack.

Transfer trends

August has also brought conflicting news for DFMs who have become accustomed to pension transfer money making its way to their portfolios. The regulator’s proposed ban on contingent charging, if enforced, could well put another brake on the surge in transfer business seen over the past two years. 

It was life companies rather than DFMs who were arguably taking the bulk of this money: think modern-day with-profits strategies like Prudential’s PruFund. But discretionaries have undoubtedly been beneficiaries as well. 

The flipside is that transfer values themselves continue to soar as gilt yields plummet. XPS Pensions notes that those values reached an all-time high this month, and have now risen 10 per cent in the past year alone. That should ensure that those discretionaries with a reputation for prudent investment should continue to prosper from this trend in the months to come - whatever happens to charging structures.