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The special relationship
The US stock market has dominated investor thinking once again in 2020. But the US's growing dominance in portfolios isn’t confined to equities alone. Fixed income allocators are also increasingly looking across the Atlantic for succour.
For UK based wealth firms, there’s always been a push-and-pull approach to US bonds. When it comes to credit in particular, US markets are several times deeper and more liquid than their European and UK counterparts. Set against this is the obligation for most corporate and strategic bond funds to hold at least 80 per cent of their funds in sterling-denominated assets.
Hedging investments back to sterling has been an obvious way for managers to have their cake and eat it. Of late, that’s become more necessary than ever: while credit spreads in Europe have fallen in line with US peers, high-yield issuance has lagged well behind. Those wanting to play the rally have had to turn elsewhere.
On the plus side, hedging costs have also fallen in recent months. The combination of these two factors mean that US securities are now accounting for a greater proportion of the underlying investments in many bond funds.
And buyers who don’t want hedged investments have other options. Those seeking dedicated high-yield exposure aren’t restricted to the IA's Sterling High Yield sector: some of the most popular strategies sit in the Global Bonds grouping, which has no currency requirements.
These trends, coupled with lingering concerns about domestic assets, are helping rid portfolios of their home biases. But the pendulum can always swing too far the other way: at a time of considerable uncertainty, too great a dependency on US assets could bring problems of its own.
Having clamped down on advisers helping savers transfer out from pension schemes, the FCA has today turned its eye to those still invested in workplace pensions. As part of that process, it’s reviewed the work of schemes’ independent governance committees – and found a number of failings.
Foremost among these is the statement that some IGCs “lack the necessary independence and were ineffective at challenging firms”. And findings of this kind may ultimately have a knock-on impact on DFMs, too.
Governance and investment committees of all stripes represent an obvious target for regulators, in that they provide a level of oversight that is supposedly distinct from underlying propositions.
It’s in this context that intermediaries should consider the growing importance of investment committees at adviser firms. Per the Platforum, almost two-thirds of adviser businesses now have such committees, up from 37 per cent five years ago.
From DFMs’ perspective, these committees have an increasingly sizeable impact on their businesses. They help construct buy lists for advisers – often with the help of the individual DFMs who sit on said committees - but they also run the rule over outsourcing arrangements themselves. Put another way, these committees make fund selection decisions, and decisions on fund selectors.
As we’ve discussed in the past, the FCA has often seemed to shy away from looking too closely at wealth managers – as opposed to advisers or fund firms – in its recent supervisory work. But investment committees combine aspects of all such businesses – and it may be that they prove the route by which the regulator starts scrutinising DFMs more closely.
Boston Consulting Group’s 20th annual global wealth report makes a familiar prediction: growing pressures on wealth management will mean the big get bigger, and the middle gets “squeezed out”.
This calls to mind the predictions made time and again over the past decade regarding the fate of asset managers. But on that front, while the big have got bigger, the middle has become more of a sweet spot in the UK: boutiques are all the rage in professional fund buyers’ eyes.
Could the same thing happen with wealth firms? Striking the right balance between personalised service and economies of scale is difficult in any sector, but the UK wealth market is not so large as to make it impossible. Consolidation will mean more small and mid-sized firms get scooped up, but equally there’s a relatively steady supply of new entrants who continue to grow. Occupying the centre ground may not be as tricky as some predict.