Off piste

The rising rate of consolidation in UK wealth management could well hurry an industry-wide shift towards buy lists that look very similar to one another. But it’s not just the nature of those buy lists that’s producing homogenised portfolios - the clampdown on investment managers’ ability to buy off-list is also a factor.

The reasons behind the shift to centralisation, which has been in tow for the past few years, are pretty obvious: suitability concerns and the rise of model portfolios have led many wealth firms to conclude that their managers should be kept on a pretty tight leash.

The counter-argument - that each client is different, and that investment managers need to have the courage of their convictions - is also compelling. 

And the latest evidence suggests that both attitudes are holding firm for now. Money Management’s DFM survey, published earlier this month, questioned 30 discretionaries on their practices in this area. Just over half of firms said their investment managers aren’t able to choose funds from outside a centralised buy list - a similar proportion to those who said the same last year. 

Around 15 per cent said they did not use buy lists at all (again, the same percentage as in 2018), with the remainder giving their managers a degree of free rein - albeit typically within the confines of a centralised approval and monitoring process.

Most notable was the number of firms who have shifted their position over the past year. Though the headline figures haven’t budged, more than a quarter of DFMs now give their managers more discretion over fund choices, or vice versa. 

A lack of distinction between ‘managers can’t buy off list’ and ‘they can, but with strict conditions’ may explain some of these switches. But it’s likely also a sign that wealth managers are still trying to figure out how to juggle competing impulses when it comes to fund selection.

Snakes and ladders

Short-term it may be, but events in equity markets last week have given allocators plenty of food for thought. Early last week we remarked on the reversal going on under the surface in US equities; that continued to play out in subsequent days. Headline indices haven’t moved much, but momentum stocks have sold off, and value stocks have rallied sharply.

This is still a bond story at heart. A rise in bond yields - signalling a slight uptick in economic optimism - has gone hand-in-hand with value shares’ bounce.

That’s a fairly understandable state of affairs, historically speaking. Less common is the sight of US Treasuries selling off in tandem with momentum. Morgan Stanley notes that the correlation between momentum plays and bond yields “is close to its most negative ever levels”. 

Allocators are having to think hard about whether their terminology is still fit for purpose: quality and bond proxy stocks are more or less the same thing as momentum plays as it stands.

That has its own implications for smart beta funds. And all this activity going on beneath the surface, if sustained, would also have an impact on the active v passive question in general. The sight of in-favour active funds hurting at a time when markets appear to be calm would require more explanation than usual on wealth managers’ part.

That is, of course, if these recent moves are indeed sustained. There is reason to think this is a temporary shake-out, driven by short covering rather than a real shift in positioning. After all, it’s the most-shorted stocks in the market that have done particularly well over the past week.

For now, discretionaries will be content to look past the noise. But a couple more weeks of similar moves would force them to confront some of the issues outlined above.

Oil avoidance

The fierce rally in oil prices seen overnight, and the headwinds that will produce for the global economy, may act as a barrier to any continuation of the September rotation described above. But it’s also a timely reminder that some things will always remain out of the hands of even the best-prepared wealth managers. 

The oil price has long been a prime example: much more sensitive to geopolitical tensions than the average asset, its inherent volatility - coupled with the fact that it has been stuck in a relatively narrow trading range for several years now - is part of the reason why DFMs have tended to shy away from energy strategies in recent times.

This weekend’s developments are unlikely to change that, either: a price of $71 a barrel is still low by historic terms. In this case, sitting on the sidelines looks like the best solution all round.