Asset AllocatorNov 27 2019

Wealth firms turn tactical in race to prep portfolios; Ignoring the elephant in the room

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.

Forwarded this email? Sign up here.

Quickfire

With style shifts and other alterations changing the face of portfolios, “wait and see” is no longer the phrase of choice for DFMs in 2019. But many of the moves they're making are tactical in nature - and the way that these changes are being implemented is also worth highlighting.

Our own analysis shows that, with markets continuing to march upward, wealth firms’ passive-heavy strategies are still outshining conventional portfolios for now. But when it comes to the latter, passives still tend to be turned over more heavily than their active counterparts.

At Tilney, several recent allocation moves – such as buying back into equities at the turn of the year, before taking profits in July – have been executed in part using ETFs. At Octopus Investments, the multi-manager team has taken a similar approach, moving the dial via passive funds so that active holdings still have room to breathe.

Octopus senior investment analyst Tom Buffham notes that the team tries to keep active positions “fairly stable”, with most tactical trading via passives. But he does question whether current dynamics lend themselves to an active approach:

Normally we trust the [active] management. 2018 was a bad year for active management. The cycle has been very politically driven and active managers don’t have much of an edge there. They are better at economics but when economics is driven by trade wars and Brexit, do they have a real edge?

That’s not to say selectors are giving up on bringing in new active names. Tilney's Ben Seager-Scott says the company has initiated a position in Loomis Sayles Global Growth, in part due to its comprehensive due diligence process. Octopus, meanwhile, has bought Ardevora Global Equity as a way to broaden its global equity exposure.

Elephant in the room

Economists and strategists have spent much of the year preoccupied with a relatively new question: whether or not the US will soon fall into recession. That focus has led to a more persistent uncertainty - the fate of China’s economy - being pushed down the agenda.

Some fatigue on this front is inevitable. We’re now many years on from the first mention of a hypothetical hard landing, yet there’s still little sense of how a slowdown might play out. That said, infamously unreliable data hasn’t prevented bad news from emerging - earlier this morning figures showed industrial firms’ profits shrank by 10 per cent year-on-year last month.

Beijing has introduced fiscal and monetary easing measures in a bid to offset these headwinds, but thus far these efforts aren’t comparable to the 2016 stimulus programme that temporarily primed the pumps once again. 

That caution may partly be because of concerns about an already-overheated property market, as well as inflation that is near an eight-year high. This time there are trade-war issues to consider, too. The questions over China’s near-term fate are becoming more pressing as Beijing attempts to balance these risks.

In the past, the simple way to play the China story was via broad-based commodities investment. That trade ended several years ago now. Some strategists suggest a present-day alternative is to focus on the commodities that the country still lacks. But metals like nickel and iron ore have their own issues to contend with. In this context, it’s no surprise that many allocators are ignoring the commodities complex altogether nowadays.

Doing something similar with China as a whole is not so simple. As of yesterday, A-Shares now account for 4 per cent of the MSCI Emerging Markets Index. One way or another, allocators will soon have to give serious thought to how the Chinese economy will affect their portfolios.

Winds change

Brewin Dolphin’s full-year results released this morning are that relatively rare thing: a decent set of 2019 numbers for a DFM business. 

The sector in general is still finding flows hard to come by as competition (and regulatory costs) rise. Brewin’s discretionary flows have managed to hold up in the face of that challenge, driven by a 27 per cent rise in MPS assets to £3.8bn.

But this rise does mask a headwind of a different kind. Net flows from intermediaries, until recently seen as a major growth channel for discretionaries of all stripes, fell from £1bn to £400m. The catalyst for that drop was, according to Liberum, the slowdown in pension transfer business being done by advisers.

That’s an issue we flagged earlier this year - and while it seems to have affected some DFMs more than others, it's highly unlikely that these volumes are going to rebound any time soon. Wealth managers are no longer able to bank on a wave of money coming through their doors, and 2020 won’t be any different.