Case for the Defence

With much of 2019 having already been and gone, the year's market gains might already feel bittersweet to some wealth managers. Valuation concerns aside, DFMs are well aware that uniform price gains make it harder for their active picks to come out ahead of indices, and therefore cheaper passive offerings.

Those wealth managers also running passive-heavy model portfolio ranges can at least take some cheer if these have surged ahead. But while our analysis shows the passive approach has worked out well within the confines of a Balanced portfolio, the dynamic looks slightly different elsewhere on the risk spectrum.

We’ve revisited our research, this time looking at how passive-dominated Defensive models performed versus their active equivalents in the year to the end of August. The results are below:

This is a smaller sample than our Balanced snapshot, but the results arguably say more. While Balanced passive portfolios tended to run ahead of their active peers, the water is muddier when it comes to lower-risk offerings. One active model lags behind its passive equivalent by more than 3 per cent, but others in the sample have outmanoeuvred lower-cost portfolios.

Why is this? One obvious answer has to do with the government bond rally: with sovereigns holding firm in late 2018 and rallying hard this year, an active overweight or underweight can shift the dial when it comes to performance. With gold also surging ahead, big calls on other safe-haven plays have also likely had an impact.

The unusual market moves of the last year mean all of this could yet turn on its head in the months to come. And with many diversifiers looking troubled one way or another, DFMs may feel a more active approach is warranted.

Rational exuberance

On balance, WeWork's decision to pull its high-profile IPO earlier this week is probably a good thing for tech stocks and US equities more broadly. For all the concerns about where the next bubble may lie, this is one more piece of evidence that irrational exuberance is still in relatively limited supply.

That speaks to a major investment paradox of the past 10 years : risk assets have soared, but memories of the crisis have loomed large all the while. And as the final quarter of that decade nears, wealth managers nervous about the future will be taking closer look at their own tech positions to see where they stand.

Here, too, there's little suggestion that markets have got ahead of themselves. Take the investment trust space as a barometer of sentiment: Scottish Mortgage's share price has slipped to a discount to NAV in recent weeks. According to calculations by Numis, it's now one of the cheapest equity investment trusts available.

This may be a somewhat backward-looking assessment, admittedly. And some might say the discount indicates a period of underperformance has already begun: tech-dominated portfolios have had to contend with both an August sell-off and a recent reversal in the momentum versus value trade.

Yet this week has been more like business as usual for investors; value stocks have started to struggle a little once more. Tech positions have regained some poise, too. Importantly, however, UK investor interest is still not flooding in.

To turn to the investment trust space once again, Allianz Technology - one of the best performers in the entire investment company universe this year - still only trades on a 1 per cent premium to NAV.  From DFMs' point of view, an attitude of cautious approval may strike exactly the right balance for their portfolios in the months ahead.

Red herring

Another day, another Mifid backlash. While the FCA has hailed the unbundling of research costs as a success, industry figures argue Mifid-induced transparency is hurting fund flows.

In what's already a fairly cyclical industry, this might not seem unduly concerning for most. But what’s more interesting is the latest iteration of an old argument: fund managers claim that Mifid II cost disclosures are causing investors to focus too closely on headline cost at the expense of returns.

JPMorgan Asset Management says it has seen data showing investors are jumping ship from better-performing funds with higher reported costs in favour of cheaper, “more poorly performing” names.

The asset manager recommends a drastic remedy: removing figures showing the cumulative impact of costs and charges from disclosure documents. That may look a long shot, but it's another example of how fund managers haven't given up the fight on cost disclosure overhauls just yet.