Trash talk

The debate over the nature of funds’ corporate bond exposures has become subsumed this year by the rally enjoyed by all types of fixed income. Importantly, however, the continued surge in bond prices isn’t quite playing out as investors may have expected.

On one level, a healthy 2019 for fixed income looks like business as usual. An era of low rates has spelled further good news for bonds, and even the sight of tightening monetary policy in the US failed to unduly shake up the corporate bond market in 2017-18. 

Years of rallying prices then started to raise concerns about late-cycle risks, particularly when it comes to leverage. But the latest data suggests lessons of the financial crisis haven’t been forgotten after all. 

Figures from Goldman Sachs show that “low-risk” corporate bonds are on track to outperform other parts of the market for the ninth consecutive year in the US - in both the investment grade and high yield markets. 

So low-risk IG names, for instance, produced a total return of 8.1 per cent in the first nine months of this year. That compares with 4.7 per cent for “high value” debt and a 2.3 per cent gain achieved by running recent “winners”, according to the investment bank.

As the name suggests, it’s higher-quality bonds that make up the bulk of the IG low-risk group: almost half of this pool are A-rated. By contrast, the BBB bonds that have raised eyebrows in some quarters make up 22 per cent. This is the real point of differentiation: triple-B bonds’ basket weighting rises to 50 per cent for the high value grouping, and 79 per cent of the winners index.

In short, then, there’s been little evidence of a dash for trash at the expensive of prudent investing, either this year or over the past decade. But different market segments will have different needs, of course. The question for wealth managers remains the same as it has been for some time: are attractive total returns enough to compensate for the lower-level of income on offer from safer debt? 

Don't look down

First zero-fee index trackers, now zero-fee share trading: the latest race to the bottom in the US investing world has begun. Charles Schwab’s decision to scrap trading commissions - for ETFs as well as stocks - was swiftly followed by similar moves at rivals TD and E*Trade last week. It's a development that won't have escaped UK wealth managers. 

These shores experienced their own fee-free moment not two months ago, when digital bank Revolut launched its own service in early August. That, however, was capped at three free trades a month - and it will be a long time before the firm can hope to rival established players.

Yes, an inkling of price pressures can be seen in Hargreaves Lansdown’s recent decision to cut scrap exit fees and a range of other charges - but that was arguably driven more by recent reputational issues than an immediate competitive threat. 

That relative lack of competition underlines an important difference between the US and UK markets. The absence of zero-fee index trackers on these shores is due to issues with economies of scale. But in the D2C market, the absence of a real price war is more to do with the absence of big-name challengers to Hargreaves. New entrants and disruptors have tried to price themselves at low levels in the past, but they’ve never really made a dent in HL’s dominant position. 

Disruptors who rely on new offerings, rather than price, have also struggled to take off, as Nutmeg’s latest annual loss underlines. 

Hargreaves’ biggest rivals, Interactive Investor and AJ Bell, are scaling up fast. But they’re still a long way off the market leader in AUM terms. Nonetheless, the evidence from the US does suggest the two markets are moving in similar directions: across the Atlantic, brokers have shifted from fee revenues to earning money on client cash and even setting up advice arms. Both are services that HL has turned to in recent years - the former in particular. Wealth managers will be keeping a wary eye on what happens next.

Don't Bank on it

Parts of the UK investment world have found themselves under significant levels of scrutiny since the EU referendum, and not all of it has been justified. Jacob Rees-Mogg's connection with Somerset Capital has attracted inevitable attention, but the focus on its emerging market funds also led to misconceptions about the nature of UK-based investment strategies. 

That was nothing, however, compared with the pervasive rumour that hedge funds have been "betting on a no-deal Brexit". Even ex-Chancellor Philip Hammond appeared to endorse the theory last month, an assertion which must cast serious doubt on the validity of his 'Spreadsheet Phil' nickname.

Now there's another intersection between fund management and British politics: the suggestion that Helena Morrissey's resignation from L&G last week means she is set to take over as governor of the Bank of England. This rumour, at least, isn't based on a misreading of the data. But as unlikely outcomes go, this would be right up there with the biggest gambles of the past three years.