Asset AllocatorFeb 10 2020

Wealth firms squeezed as assets head for the exit; Goldilocks keeps the bears away

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Cash flow problems

Official data shows the post-election rush to UK equity funds was real and sustained, despite some DFMs’ relative reluctance to get involved. And that’s not the only area where discretionaries are out of sync with the wider market.

Retail sales figures for last December contain little surprise on the surface. A net £1.3bn was invested in UK equity strategies of all stripes - a record amount, according to Numis. That helped push overall net sales to £3.6bn, the highest level in almost two years. 

Global and US equity strategies also flourished, as did multi-asset funds and a variety of bond asset classes. That left physical property and absolute return vehicles to take up their now-familiar role as laggards.

In among this relative serenity, the one sector surprise was arguably the £150m outflow from EM equity funds. But there’s no doubt those redeeming will feel pretty happy with that decision based on this year’s evidence thus far

Yet the data again suggests wealth managers have bigger concerns than asset allocation at the moment. Figures for net retail sales by distribution channel show that the amounts arriving directly as DFMs’ doors are still out of step with other areas. Despite the bumper month for flows, a meagre £160m was invested with discretionary managers - compared with £2bn via fund platforms and £760m via UK IFAs.

That’s not quite as calamitous as November, when a record £680m was redeemed from DFMs despite the wider market seeing £1.6bn in inflows. Some of these outflows might be offset by wealth manager MPS taking a greater share of those platform inflows mentioned above. Nonetheless, the figures underline the stresses - cost pressures among them - facing the sector at the moment.

Easy does it

As the effects of the coronavirus begin to be factored in to forecasts, market moves are taking on a familiar shape. As we discussed last week, investors’ predominant preferences of the past decade are back in full force: quality growth remains the focus.

Once again, there’s also a notable disconnect between what the equity and bond markets are saying. As the FT’s Market Forces newsletter highlighted last Thursday, equity and fixed income buyers are looking at the same data and each concluding it means a buying opportunity for their asset class.

The market’s focus on quality growth means this has a relatively simple explanation: it’s not the cyclical stocks that are being bought up by investors, after all. 

An alternative theory is the Goldilocks thesis: a growth shock produces a small sell-off, but only until investors factor in a further loosening of policy - and then return to risk assets as interest rates and bond yields fall back. 

Capital Economics thinks this year has brought a return of that pattern. It warns that there are various headwinds that could derail this pattern, the most likely being that it might produce “bubbles in some pockets of the market that then burst”.

This has been a perennial concern over the past decade, of course, and one that has yet to play out as feared. The areas that the forecaster sees as particularly vulnerable - Chinese property, the corporate bond and leveraged loan markets - will also come as no surprise. But as Capital concedes, the risks are currently “moderate rather than extreme”. Once again, investors might be finding it hard to conceive of an end to the 'just right' environment any time soon. 

Ripping up reliefs

It’s not just Aim tax reliefs that are potentially on the table at next month’s Budget. Pensions tax relief is once again in the Treasury’s sights, among other significant personal finance measures. After a (relatively) prolonged period without major changes to the savings landscape, March may hold a few surprises for the investment industry.

We've been here before, clearly: George Osborne backed away from overhauling tax reliefs, and in subsequent years the combination of Brexit business and a government without a majority meant the issue never fully returned to the agenda. 

Now, in 2020, major changes are again a possibility - even if they cause upset among certain parts of the Conservative party. March 11’s Budget will be the first of two scheduled for this year, so any changes might be put out to consultation first. But this time there may not be any respite for advocates of the current system.