Aggressive portfolios provide a case for the defence; Wealth managers' stay-at-home risks
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Upside down
For wealth managers, the latest oil price shock risks inflaming an issue that’s already proving tricky to manage for their model portfolios.
By now, DFMs are well versed in the divergence in global equity market performance seen over the past couple of months. US equities, tech stocks in particular, have continued to flourish even when times are hard. Other indices, like the commodity-heavy FTSE 100 or value-tilted European benchmarks, have underperformed in good times and bad.
The problem is one of relative risk. At times when risk assets sell off, investors rightly expect their most aggressive portfolios to underperform. That had been case in February, but the composition of some wealth manager portfolios means this narrative is now being challenged.
The UK market’s significant underperformance versus the US has resulted in some aggressive portfolios – typically filled with global equities at the expense of domestic stocks – losing less than the growth portfolios that are supposed to be safer.
The Q1 performance of the Pimfa Private Investor benchmarks emphasises this divergence. The riskiest index, Global Growth, shed 15.2 per cent – better than the 16.9 per cent lost by the Growth index, and almost as defensive as the Balanced index’s 14.7 per cent drop.
Wealth managers whose first-quarter scorecards show something similar have reassured investors that these discrepancies will correct themselves over time. Indeed, there are signs that oil’s slump has done just that this week: its impact on sentiment meant the S&P’s performance has been more in line with equity benchmarks overseas. But if a renewed drawdown once again sees investors prioritise US quality stocks and shun commodity shares, these differences will persist for a good while yet.
Stuck at home
Not all DFMs have seen their portfolios behave in the way described above. Aggressive portfolios’ relative resilience largely depends on whether investment managers have opted to turn to US stocks for diversification. Those who have used, say, emerging market allocations to replace UK weightings have largely seen performance suffer as you'd expect.
Either way, there’s an opportunity at hand for those who do decide to limit their home bias. Overseas equity funds are still under-owned by fund selectors in comparison to their domestic equivalents. Our fund selection database shows more than 125 different UK equity strategies are currently held by discretionaries’ models, compared with 75 in the US, 55 in Europe, and 50 dedicated EM offerings.
That’s partly because the UK accounts for a much larger part of portfolios than most other equity regions, but the point still stands. Nor is it simply due to a lack of options elsewhere: offshore strategies, feeder funds and segregated mandates mean there are plenty of choices available to selectors in whichever region they care to look.
And while the wide range of UK equity preferences does obscure the fact that a handful of big players do feature in a sizeable proportion of portfolios, it doesn’t mean DFMs are unaware of their domestic alternatives.
By contrast, the sense is there are overseas opportunities out there for those buyers prepared to put in the work. Either the overall quality of UK equity managers is much higher than those who invest elsewhere, or rival fund selectors aren’t making the most of the global or regional options available to them.
Yielding ground
The Investment Association’s move to suspend its yield requirements for equity income funds is, in a word, sensible. Whether it changes much for investors is another matter.
One demand for income managers has been removed, but the principal driver of the reach for yield – an ever-growing band of investors who rely on income from their investments – remains firmly in place.
Be that as it may, both these funds and their investors will ultimately have to accept lower payouts this year. The IA’s move makes it easier for fund managers to be honest with their investors – and most are prudent enough not to pile into high-yielding dividend traps as a temporary fix.
But the impulse to move along the risk scale in the search for income won’t be entirely absent. Fund buyers will still have to keep their eyes peeled for managers who push the envelope too far in troubled times.