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Allocators reap the benefit of equity markets' proxy war; Wealth managers' short straw on fees

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Proxy war

With the end of the quarter fast approaching, a convenient excuse is at hand for last week’s equity market dip: portfolio rebalancing after three months of healthy gains.

Of course, that’s not the only potential catalyst: the continued spike in US coronavirus cases has got plenty of investors nervous again, particularly as there seems little safety net built into risk asset valuations at the moment.

But there are reasons to think equity valuations aren’t as out of kilter as they instinctively look. Many benchmarks remain near their peaks, and yet the equity risk premium is still pretty elevated – implying investors are still right to be favouring stocks.

As SocGen’s multi-asset analysts note, ultra-low government bond yields are a big factor in this discrepancy. G7 sovereign bond prices are still sky high – and the continued shortage of safe assets is paradoxically making risk assets look more attractive, too.

Clearly, this dynamic could still be derailed by the virus's developed world resurgence. But absent this kind of external shock, there’s still reason to think equities have their structural attractions.

The link with bonds is even more apparent via other metrics – and these statistics suggest that appetite for risk is more nuanced than headline valuations suggestion.

Globally speaking, the shares with the highest historical correlation to bonds have a median forward P/E ratio of 24 times, per SocGen. Those with the lowest levels of correlation, by contrast, have a P/E of just 10 times. One way or another, the bond proxies are still ruling the roost as the second half of the year begins.

Priced in

Price pressure across the retail investment industry is an accepted reality for DFMs, but the benefits can sometimes be hard to discern.

Wealth managers may bemoan a race to the bottom, yet many of their peers have found joy with discounted model portfolio ranges, or passive multi-asset equivalents. That means demands for others to follow suit are never too far away.

When it comes to the products that DFMs buy from providers, however, there’s less evidence of success. Yes, most discretionaries now take advantage of low-cost passive options in at least some of their portfolios. But they, and other retail fund selectors, have been less enamoured of lower-cost active strategies.

Those strategies are back in the news today via Nomura’s decision to introduce founders’ fees of 0.1 per cent for several of its funds. These charges will stay in place until the strategies reach $150m in size.

Fees amounting to just 10 basis points seemingly represent a new low for active management costs. But wealth managers, to their credit, have tended to stick to their “price isn’t everything” philosophy even when confronted with attractive deals. Neptune’s 2015 offer of a 0.25 per cent share class for its Global Income fund barely had an impact on that fund’s assets. And even long-term offers can struggle to gain traction: Franklin Templeton’s 0.45 per cent charge for several of its UK equity funds has only really translated into material interest in its UK Equity Income offering.

Needless to say, the missing piece of the puzzle is performance: it’s only when returns are as compelling as fees that professional buyers tend to take a closer look. DFMs’ own relative performance, by contrast, can be harder to discern. That makes them more vulnerable to low-cost alternatives – meaning they tend to get the rough but not the smooth side of industry-wide price pressures.

State of affairs

Fees are also coming down this week at Stewart Investors: the firm is reversing the longstanding soft-closures of several of its products, and removing hefty initial charges as a result.

The re-emergence of the firm’s Gem Leaders strategy will remind selectors that emerging market and Asian equity selections used to be split between precisely two firms: First State and Aberdeen Asset Management, as they were once known.

The industry has moved on since then: company names have changed, managers have moved on, and developing equity allocations are now altogether more diverse. On the performance side of things, Gem Leaders has also seen better times: its Indian overweight hasn’t served it particularly well in either up or down markets of late. With Stewart Asia Pacific Leaders still among the top picks among Apac strategies, its emerging markets equivalent faces a tough time getting a look in from buyers.

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