Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.
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Sticking with carrots
All in all, it was a pretty good Budget for DFMs. After months of concern about how taxation changes might affect businesses, it's now carrots, rather than axes that are now being dangled above them.
The mooted changes to inheritance tax - and the possible repercussions for Aim portfolios, were business property relief to be form part of that overhaul - didn't happen. Nor was there any indication of a consultation in the works. Pensions taxation was largely left untouched, too, with the exception of the tapered annual allowance. That burden has been eased.
And there was more potential good news found elsewhere in the documentation. A consultation on how overseas funds are marketed in the UK post-Brexit should help clear up one of the lingering uncertainties of life outside the EU for fund selectors.
More significantly, the government is promising an examination of the UK funds regime this year, and has kicked things off with a review of VAT on investment management. EU rules stipulate that such taxes don't apply to conventional investment funds, and there's little prospect of that changing once the transition period ends. So why the review? Well, DFMs will hope that their own sector can be a beneficiary. Removing VAT from portfolio fees would give them a particular boost at a time when cost pressures are influencing everything from client preferences to fund selection.
Unsurprisingly, there's no detail yet from the government on what the review might involve, or whether discretionary services are even within its remit. And, from a regulatory point of view at least, wealth managers often slip into the cracks between the twin focus on advisers and asset managers. But this is one area where firms will be doing their best to be front of mind in the coming months.
Hitting the buffers
The grounds for optimism detailed above will inevitably be little immediate solace to wealth firms coping with another sharp move downwards for equities today. And this week, even bonds aren’t saving their skins.
Gilt yields have ticked higher since Monday, and Budget largesse wasn’t the reason why. UK sovereign debt was, as usual, following the path set by US Treasuries.
Government debt has sold off this week - a move that was perhaps inevitable, given the incredible rally seen in prior days. But the slump has come even as equity markets have continued to fall. In the US, the magnitude of the increase isn’t just because starting yields are now so low. Tuesday’s 31bps rise in 10-year Treasury yields was the biggest single-day increase since 2009, according to Barron's. For 60/40 investors in the US, yesterday was the worst day’s trading since 2002.
The culprit, as with gold a couple of weeks ago, may be investors seeking to sell anything they could get their hands on. An alternative view of that process is that allocators are simply attempting to lock-in gains as the rest of their portfolio falters.
Needless to say, credit has continued to struggle at the same time. Liquidity worries are rising again, though for now it remains sentiment, rather than a lock-up in trading, that’s the biggest problem for the asset class. Next week we’ll take a closer look at DFMs’ favourite strategic bond funds, examining how their allocations have shifted over the past year and how well prepared they are for a serious downturn.
There was one other piece of good news for wealth managers released alongside the Budget yesterday - or in the Office for Budget Responsibility's own documents, to be exact. It reported that pension freedom withdrawals were 67 per cent higher than the original estimate for the 2015-2019 period.
That does, of course, raise questions about the wisdom of some of these moves. The OBR also said that the pattern has continued in 2019/20 - and that early cohorts, whom it had expected to reduce their withdrawals by this point, continue to access funds at a consistent rate.
Pensions remain big business for wealth firms, and the wealth profile of their client base - coupled with the advice those clients are getting from their wealth managers, of course - should at least ensure that most remain on a sustainable path.