One-horse market

A back-and-forth summer for risk assets ultimately left little changed for allocators. Arguably, the momentum reversal of early September was more significant than anything that happened between June and August. But that didn't mean DFMs were sitting on their hands during that three-month period.

Our analysis of how the average Balanced portfolio changed over that time indicates a degree of reassessment going on. Many discretionaries have been content to ride the bond rally a little further. Meanwhile equity exposures in a number of regions have been dialled back - with one notable exception.

The chart below outlines allocation changes in several areas between the start of June and the end of August:

On the whole, wealth managers have reined in risk asset exposure. Cash weightings have dipped on a collective basis, but this has been more than offset by greater fixed income exposure - which has typically been in the form of government bonds. Not all DFMs share the worries we discussed last week regarding expensive insurance.

But it's on the equity front where things get more interesting. A number of regions have been pared back, Europe in particular. Japan allocations (not shown on the chart) fell by a similar amount. Concerns about the trade war, and the Chinese economy, appear to have hurt Asia ex-Japan exposures more than EM allocations - though this is partly due to index performance.

The fate of UK positions suggests that political risk is still taking precedence over valuations for now. If that needed further confirmation, consider US weightings.

With the world's largest equity market still relatively insulated from trade war issues, discretionaries have been happy to further increase their holdings. A full 50 per cent of DFMs materially increased their US positions between June and August; just 10 per cent opted to pare back allocations.

This isn't the first time wealth managers have seemingly sought refuge in US stocks - we observed a similar phenomenon last year. It all suggests that, for many, the US market remains effectively the only game in town.

Good news, bad news

Compelling as market ups and downs might have been this summer, events closer to home have given DFMs plenty to think about.

Cost pressure, market volatility and domestic uncertainty can all spell trouble for wealth managers on a commercial level. And with none of these issues going away, some businesses are beginning to show signs of strain.

Investec warned last week that its wealth division would likely report lower operating profits amid a costly restructure, citing “challenging” market conditions. The business has seen a substantial amount of change in recent times, including the closure of its struggling Click & Invest robo offering and plans to spin off its asset management unit.

It’s not just Investec feeling the pressure: Walker Crips pointed to Brexit-driven uncertainty as it reported a 47 per cent decline in pre-tax full year profit back in its latest results.

In the current environment, poor results are likely to draw even more attention than normal for wealth firms under the cosh. But it’s notable that even in tough times, some are managing to post good numbers.

Brown Shipley, for one, has seen recent acquisitions pay off, with its 2018 profit before tax coming to £5.8m versus £5m in the previous year. In other good news, Hawksmoor claimed it was beginning to reap the benefit of three years’ investment, as underlying profit spiked in 2018.

These cases could well be idiosyncratic, with recent bouts of investment starting to bear fruit. But it shows that even as market difficulties become more apparent, some strategies are paying off.

Little interest

With all eyes on the performance of certain investment factors in equity markets lately, it’s easy to forget the rise of more granular approaches in the fixed income space.

As noted in FTfm this morning, investors are starting to pay greater attention to specific factors when taking bond exposure, at least within the institutional realm.

It’s an approach that makes some sense. With valuations looking almost frothy and seemingly little return left to be made, targeting specific factors might be one way to eke out returns – or yield – from an asset class that has perplexed many.

Will DFMs take an interest? For now, it seems like a long shot. Smart beta products are rare enough tools for wealth managers in the equity space, and many may rather rely either on the breadth of passive exposure or the expertise of a bond manager – strategic or otherwise – to pick out remaining alpha. But it’s another development that may well one day feed through into portfolios.