A change of heart

At a time when many investors are approaching a point of peak uncertainty, it’s not surprising that wealth managers are choosing to stick with their existing decisions. But there are growing signs that a jostling for position is starting to bubble up beneath the surface.

On an asset allocation level, our analysis of September model portfolio shifts shows that many of the trends seen so far this year have either come to an end or taken a pause. Weightings to the likes of European and Japanese equities, which have fallen throughout 2019 in Balanced portfolios and did so again in August, remained static in September. Bond allocations have topped out for now, and nine months of paring alternatives positions have stopped, too.

DFMs did, inevitably, still have both the willingness and the ability to top up US equity allocations further. More added than reduced US positions on the month. But two discretionaries did slash their weightings to the world’s biggest equity market quite significantly. That ensured the average Balanced portfolio’s US position fell back slightly from August’s record high of 13.9 per cent.

Yet North American alterations weren’t the only thing going on last month. Wealth managers’ underlying fund selections were turned over more considerably than the above stasis would suggest. Many DFMs seemingly felt that while their asset allocations were correct, the investment styles they favoured required a bit of tweaking. 

We’ll look at some of these changes in more detail next week, but there’s one final shift to note from September. Size as well as style was in focus for several wealth firms. This cohort used the end of the quarter to scale down the number of funds they hold across their model portfolios. As risk asset valuations stretch out further still, the thinking is that only conviction positions have a chance of flourishing from hereon in.

Income inquiry

M&G’s stock market debut has proven a pretty underwhelming affair. Its shares have dipped slightly this week and the company may not be the automatic FTSE 100 entrant that many predicted. Still, most analysts see room for optimism in the future, despite the retail fund side of the newly combined asset management and UK insurance business having shed assets over recent quarters.

But for once, it’s the short term rather than the long term that may be of most interest to wealth managers. The reasons why the initial listing proved so subdued may speak to a wider issue for UK equities. 

M&G’s subdued start to life as a public company was partly because of a share overhang. RBC analysts, however, have another angle to add to that: they noted that the natural buyers of a company with a yield of almost 7 per cent - UK equity income funds - are themselves under pressure at the moment.

The negative sentiment on equity income funds needs little explanation, though it should be stated that redemptions aren’t solely to do with events in Oxford. With the fortunes of bond proxies again being called into question and the outlook for UK dividends now less rosy, funds in the sector have questions to ask of themselves. 

All isn’t lost. Even if equity income funds don’t have the cash to buy more of M&G or other dividend-paying stocks, that might just preserve the attractiveness of those companies’ dividend yields. UK income funds should still produce decent payouts for investors for the foreseeable future: there isn’t an existential threat lying around the corner.

Nonetheless, fund selectors, who tend to change income funds far less frequently than they do other managers, might want to ensure their holdings are best placed to withstand the changing tides.

Neutral base

Jeff Vinik, the US investor who rose to prominence on the Fidelity Magellan fund in the 90s, has shut his hedge fund business for a third time, just eight months after relaunch.

Mr Vinik has said that big buyers no longer favour long/short stockpickers like himself, adding that lengthy due diligence processes also made it hard to start from scratch. But the real tell is elsewhere in this FT article: it’s the volatility, rather than the active management, that has likely put off institutional investors.

It’s the same in the DFM space. Taking risk is a fundamental part of investing for the long-term, and there are obvious examples of volatile long-only equity managers with whom discretionaries are willing to place their cash. But when it comes to alternatives in particular, excess volatility is a no-no in an era when growing numbers of clients are sat in cautious or balanced portfolios. The age of the market neutral portfolio is already here, and that leaves little space for the mavericks of old.