Bargain hunt

Asset Allocator has largely shied away from discussing prospects for the UK equity market over the past year. Not because of Brexit fatigue, as such, but simply because gauging the level of political risk that may or may not hang over domestic stock markets has been an impossible task.

Almost 12 months on from our launch, and little has been resolved on that front. But recent weeks have brought the unusual combination of both greater political dysfunction and a greater belief that worst-case scenario will be avoided.

Though no one is quite sure what the prime minister’s next move will be, the events of early September would appear to have reduced the near-term risk of a no-deal Brexit. Appearances can be deceptive, particularly when it comes to Brexit, but that is the prognosis that has started to be factored in to UK investors’ thinking this month.

Unfortunately, that presents allocators with an unusual combination of their own. Valuations in the FTSE 100 are now trading at close to a 20-year low, according to analysts at Credit Suisse. Add to that the prospect of fiscal stimulus, and a UK consumer enjoying a rare spot of wage growth, and all of a sudden there’s a bit more of a case to be made for UK assets.

The problem is that the sight of light at the end of the Brexit tunnel is typically accompanied by a rally in sterling. For mega caps, that spells bad news. It’s for this reason that Credit Suisse last week went overweight the FTSE 100 – but only in dollar terms. Might venturing down the cap scale be a better bet? For wealth managers disinclined to stray from multi-cap mandates, a reconsideration may be soon be in order – assuming the country survives the end of October unscathed.

Lost property

One domestic asset class that DFMs have already reassessed over the past year has been commercial property. This newsletter has kept similarly close tabs: our very first edition noted that discretionaries may increasingly seek halfway house solutions, as well as certain investment trusts, at the expense of open-ended funds.

The catalyst for that change – new rules from the FCA – has not yet arrived. Those regulations have been delayed to take into account this year’s higher profile illiquidity events. But the shift has happened nonetheless.

Headline figures show that retail investors’ flight from open-ended property funds remains ongoing, and our own fund selection database shows that wealth managers are now increasingly unlikely to hold any such funds at all.

Of the 70 different instances we’ve catalogued of a DFM holding a property fund within their model portfolio range, less than 10 are traditional open-ended physical property strategies. What’s more, four of that number are courtesy of a single wealth manager. The move away from this kind of fund has continued during a relatively quiet summer: a handful of discretionaries have chosen that lull to rotate away from daily dealing strategies holding physical property assets.

With pricing changes, raised cash levels, and the threat of new rules looming, it feels like the obvious move to make.

But perhaps this exodus isn’t quite so unequivocal as it first appears. The latest flight from property began in earnest, after all, at the turn of the year as the original Brexit deadline hove into view. It remains to be seen whether the removal of EU withdrawal-related uncertainty, if and when that finally happens, will resurrect interest in the asset class.

On the up

From performance scrutiny to an increasingly cost-conscious client base, wealth managers are all too familiar with the Mifid II effect by now. And for many it could mean the same thing: bowing to fee pressure while cutting costs elsewhere. But the latest rumblings suggest some overheads are, in fact, on the rise.

The price of market data has long been a bugbear among asset managers and other professional investors, and contrary to some expectations Mifid II has not helped matters. As Ignites Europe reports this morning, a growing need for market data under the new rules has only seen prices move upward.

Fund firms are particularly aggrieved at this. Invesco describes such fees as “overpriced and extremely difficult to keep under control, given the complexity of the charging structures that have been put in place”. Market participants also complain that comparing charging structures remains tricky in an opaque industry.

Wealth managers may well feel the effect of this less than the average fund house. But with DFMs increasingly need to focus on costs, rising prices further down the chain are less than welcome.