Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.
Forwarded this email? Sign up here.
The pressure on dividends shows no signs of abating: this week grumblings among insurers are on the rise, and something akin to a lost decade is now being predicted for the US market. But changes to the other main method of returning cash to shareholders – buybacks – could have just have much import for allocators in the coming months.
Yes, April has brought better news thus far for wealth managers and their peers. But payout issues are particularly relevant to the world’s largest equity market.
Futures may be predicting that 2019 dividend levels won’t now be surpassed until 2028. But the US was never that important a market for income seekers in any case. Buybacks, by contrast, have had a significant role to play in propping up the past decade’s rally, according to HSBC.
HSBC analysts say buybacks have been the most consistent source of US equity inflows over the past ten years. With corporates now pulling back – buybacks have become as politically controversial as dividends in the US – that will remove $300bn of lost inflows over the next two quarters.
So far, there’s little sign of harm being done. Flattening curves across Europe and even New York have helped deliver another equity market bounce this week. But exit strategies are likely to be longer and more drawn out than the initial lockdown periods – and the risk of false starts abounds. That won’t give businesses much in the way of visibility – and earnings downgrades are still coming through even as the market rallies.
None of this will be enough to shake the dividend-focused mindset instilled in many investors. But some may start to realise operational resilience is as important an attribute as returning cash to shareholders.
In the crosshairs
However investors prioritise in the months ahead, it’s clear that lower payouts will have consequences for retirement income strategies. As we noted last week, the spectre of pound cost ravaging continues to loom large – and there’s more than one opinion on how investment managers should guard against these risks.
As a result, DFMs who have launched dedicated decumulation portfolios over the past few years stand at something of a crossroads. Sustaining current payout levels will prove extremely difficult without ramping up risk. And one sensible alternative – wherein clients ride out the crisis by drawing down less income than usual – will sharpen the focus on whether DFMs themselves are providing value for money on this front.
As it happens, this is an area the regulator will be looking at more closely in 2020. Once again, the focus is on advisers, rather than those to whom they outsource – decumulation advice, in particular, will be in the spotlight. But its overriding concern is that the sector as a whole is functioning correctly. The FCA said this morning it sees “significant risk of harm” in the pension and retail investment space. So wealth managers should be conscious that their discretionary offerings won’t escape scrutiny if necessary.
And when it comes to decumulation, the exact relationship between advisers and DFMs is still being established. Defaqto, for one, has suggested that advisers tend to turn to bespoke portfolios more readily where retirement clients are concerned.
That should, at least, avoid the 'cookie-cutter' criticisms still leveled at those who put clients in model portfolios. But there is still a place for overarching frameworks: centralised retirement propositions continue to rise in popularity. Research conducted by NextWealth for Ascentric finds the proportion of advisers using a CRP is expected to rise from 48 to 71 per cent by next year. This will provide more opportunities for DFMs – but they should be aware the way they manage these drawdown pots will be more closely scrutinised than ever.
To conclude today’s income focus: Winterflood notes that the investment trusts to have pared back dividends thus far in the crisis are uniformly alternative in nature: they all reside in the debt, leasing or property spaces.
That’s in keeping with another broker’s recent suspicions: Stifel had previously suggested that newer offerings, which haven’t yet built up dividend reserves, looked the most exposed.
Having once dipped a toe in esoteric areas like aircraft leasing, our fund selection database indicates most DFMs have moved away from the most obscure parts of the market of late. But debt-based trusts remain popular, as does one property vehicle highlighted by Winterflood as another candidate for a cut: AEW UK Reit. There are few real alternatives for income seekers at the moment.