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Currency movements have given a big boost to wealth managers on more than one occasion over the past half-decade. Most allocators will recall how sterling’s post-referendum collapse in 2016 helped deliver stellar returns for overseas portfolios. But that wasn’t an isolated incident.
Since then the pound has suffered several smaller sharp sell-offs, whereas its rebounds have tended to be more gradual. That’s meant bumper currency gains in certain months – whereas the pain, by contrast, has been spread more thinly.
And those gains have often come when DFMs needed them most. In its post-Brexit status as a ‘risk-on’ currency, sterling has suffered when sentiment is under pressure. March was the latest example of this: FX moves helped ensure returns for the likes of US, Japan and Asia Pacific equity portfolios were five percentage points better for sterling investors than those holding local currencies in Q1.
This trend has created issues for allocators on occasion: funds like Pimco Income have seen billions of outflows since March, some of which was driven by “the effects of euro currency hedging amid a dash for dollars”, according to Morningstar.
Traders describe the current situation as “bizarre”: the likes of sterling aren’t moving much on fundamentals, instead rising in tandem with equity markets and vice versa. UK-based investors, however, will be pretty happy to take advantage of this built-in diversification for their portfolios.
By and large, the past quarter has been relatively becalmed on the currency front. The dollar’s rise may have paused for now, and the euro has started to excel in its place, but UK fund holders have seen little impact on returns from either of these moves. Allocators will have been content to focus on their underlying selections in the meantime – while recognising that forex fortunes could well favour them again in future.
Wealth managers’ active discretionary portfolios have been outshone by their ESG equivalents this year – and in some cases, by their passively managed offerings, too. But DFM assets have, at least, outperformed their advisory equivalents, according to research from Compeer’s annual survey of the wealth management industry.
In a result that might go some way to justifying wealth firms’ bid to shift assets from advisory to discretionary processes, the latter proved better at guarding against the downturn seen in Q1. Whereas assets managed on a discretionary basis fell by 10-15 per cent, advisory assets dropped some 20 per cent.
Compeer says that was big enough to wipe out the last five years of AUM growth for advisory mandates – though this part of the market was pretty stagnant in any case.
The consultancy’s other findings are a mixed bag for the industry. Revenue growth was pretty healthy again in 2020, and concerted pressure on DFM fees has still yet to materialise – at 0.71 per cent, the average firm’s return on discretionary assets has barely moved since 2016.
But there are warning signs flashing elsewhere. Net inflows across the industry stood at £20bn last year, according to Compeer – well down on the £36bn seen in 2018 and the £38bn for 2017. And this was driven not by a fall in gross sales, but a rise in gross outflows. That suggests clients are now more willing to move their money elsewhere. In tough markets, allocators will face a tough time preventing this trend from accelerating again in 2020.
Alive and kicking
On Monday we reported on DFMs’ global equity income dilemmas as they attempt to diversify their dividend streams. The good news for UK equity income managers is that their products aren’t completely out of favour just yet. In fact, figures from Morningstar show that UK income funds recorded their best month for inflows in four years in May.
That looks pretty counter-intuitive, given vast swathes of UK plc have cut payouts this quarter. But it also emphasises how few alternatives fund buyers have: they cannot very well dump their income strategies entirely. Instead, a change of approach is perhaps called for – which is why the likes of Trojan Income and Evenlode Income ranked highly in the sales rankings. The former’s particularly defensive approach, and the latter’s focus on quality growth stocks, distinguish them from the pack somewhat. And that alone might be enough for selectors at the moment.