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Asset Allocator

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Allocators ignore the difficult US equity decisions; Wealth firms tool up as M&A accelerates

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Best vs the rest

With the impact of Covid-19 seemingly strengthening the investment case for the US equity market’s leading lights, allocators have faced a difficult decision. Those wanting to diversify their equity exposure have had to weigh this impulse against yet another bout of US outperformance.

The same is as true for global equity managers as it is for wealth and multi-asset managers. Fund selectors are warming to global strategies, but those tasked with running equity funds are finding it equally difficult to resist the pull of the US market.

As of the end of May, some 66 per cent of the MSCI World Index was allocated to US equities. Even the more diverse All-Country World benchmark now has almost 58 per cent in the US – a rise of four percentage points in just six months.

Global equity managers have followed suit. Last December, we examined DFMs’ favourite global managers’ US weightings. Since that point, just two have pared their positions – Rathbone Global Recovery and, to a lesser extent, Lindsell Train Global Equity.

The rest have either been content to see their exposures drift higher, or actively added to their weightings. Even those who remain materially underweight the US have sought to close the gap somewhat: River & Mercantile’s strategy, which held less than 20 per cent in the region as of last autumn, has upped this to 27 per cent. That’s still meaningfully below most of the fund’s peers, but it might also indicate that even contrarians are mindful of opportunity costs.

This said, there’s less correlation than some may think between US weightings and medium-term fund performance. All told, it's another sign that it’s still investment styles – quality growth chief among them – that are proving the real drivers of the current market.

Stiff competition

Protracted M&A negotiations between the larger players in the wealth management world have become a feature of the current landscape. But as lockdown eases in the UK, there are signs that the acquisition wheels are turning more smoothly at the other end of the market.

This past week alone has seen two small but not insignificant DFM businesses change hands: first Parallel Investment Management was acquired by John Beckwith’s Pacific Asset Management, then yesterday Richmond House was bought by Independent Wealth Planners UK.

These deals indicate there’s still plenty of appetite for a healthy DFM business: the structural growth predicted for UK wealth management in the coming years ensures that, even if current pressures on costs can make this difficult to remember at times.

At the same time, it emphasises that competitive pressures aren’t going away: it’s not enough for allocators to simply ride out this period of consolidation and hope to emerge as one of the few survivors. Many hitherto smaller businesses will come out the other side with deeper pockets, too.

And these trends all serve to emphasise one thing: asset allocation must get smarter if firms are to distinguish themselves in future. Our fund selection database still shows a considerable degree of uniformity when it comes to different businesses’ preferred choices. That’s unlikely to cut the mustard when it comes to adviser clients – unless, that is, it’s combined with additional strings to the bow. Yes, that could include an attractive cost proposition, but it could also mean compelling evidence of a defensive approach, or a viable retirement income offering. One way or another, resting on laurels won’t be an option.

Trust in me

A moment of truth is approaching for investment trusts. Dividend-starved retail investors are increasingly turning to investment companies, no doubt in part because of their ability to hold payouts in reserve, and certain trusts’ status as “dividend heroes”.

As the FT reports today, the potential for disappointment is considerable. Some trusts have already cut payouts, though admittedly most of those are less mainstream than the vehicles favoured by retail buyers. The risk is that more companies follow the example of Troy Income & Growth, and decide rebasing payouts is a wiser option than dipping into reserves.

Those who have managed to increase payouts for 20 years or more aren’t that likely to follow suit in the short-term – they will want to maintain the “hero” branding for as long as possible. But as Alasdair McKinnon notes, they may not be able to do so if the dividend drought persists beyond this year. At that point, reputations could well and truly be at risk.

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