Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.
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“Timing the market is not a dumb thing to do,” John Authers wrote in the FT in 2018, “but we should accept the limits on our ability to judge future probabilities, and we should never pay too much for the privilege”.
That looks like a reasonable assessment of DFMs’ own outlook. Market timing is best avoided where possible, but investment decisions don’t exist in a vacuum. Allocators may not be able to see the future, yet they do make estimates of when the time is right to buy or sell.
Investors will be reminding themselves of these issues at the moment, not least because their primary metric – valuation – is starting to become problematic again. Goldman Sachs’ research team says that both equities and bonds are now looking expensive once more– in the US, at least.
The evidence of the past few years, of course, is that valuation anomalies can persist for longer than most suspect. Paradoxically, that makes timing more important: whether to stick or twist, whether the opportunity cost is worth it, and whether there are any viable alternatives out there. With a big question mark still hanging over this third category, most UK wealth managers have stayed the course thus far this year.
There have been two particular moves of note: a slight rotation away from equities, and into credit and/or cash. Both those shifts happened around the end of the first quarter, and neither is enough to make portfolios look materially different from how they did a year ago. As we noted yesterday, a summer lull would be an unlikely time for that to change. But come autumn, the time for big decisions may have arrived. Tomorrow, we’ll examine some recent positioning tweaks that suggest how portfolios might start to shift in H2.
A report on centralised investment propositions produced by the Lang Cat last week makes for interesting reading for wealth managers – specifically those who run model or bespoke portfolios on advisers’ behalf.
It picks out investment propositions, as opposed to advice or platform fees, as the area in which prices are most likely to fall over the next few years. That’s very much in keeping with the current direction of travel, even though developments like fixed-fee offerings remain thin on the ground for now.
Come five years’ time, the Lang Cat predicts a ‘thirty plus VAT’ structure will be met with “a roll of the eyes” and little more from advisers. The arrival of more fixed cost solutions might mean the average cost of solution management falls from this level to a mere 0.05 per cent on average.
That will raise some eyebrows in the DFM space, but at the same time price pressure is a recognised trend. The proposition changes mooted by the report provide something a little different: offerings that effectively “micro-segment end clients to segments of one”, using algorithms and machine learning to match cashflow models with “unique liability-driven portfolios”, are among the more interesting suggestions. An increase in direct investing, bypassing fund structures altogether, is another inclination that’s tipped to increase.
Innovations like these naturally lend themselves to advisers increasingly collaborating with third parties – though this collaboration won’t necessarily mean outsourcing to DFMs.
Similarly, while client authorisation requirements are proving painful for almost all those running advisory portfolios in-house, the preferred solutions don’t always involve getting rid of that responsibility altogether. Advisers are either taking on discretionary permissions or looking to tech – client portals, secure messaging and so on – to help out. Wealth managers looking to take on more business themselves face competitive threats on a number of fronts.
The announcement of a parliamentary investigation into pension freedoms and associated scams will be welcomed by the retail investment industry – but a solution to the problem seems much further off.
While the work and pensions committee’s inquiry will go further than just scams themselves, the latter is clearly a particularly pressing issue. The pandemic has clearly accelerated the amount of fraudulent activity taking place in the UK – and in doing so further shaken savers’ confidence in the financial system.
The problem is that fraud as a whole is an issue that is hardly monitored at all: regulators can do their part, but criminal investigations, let alone prosecutions, are virtually non-existent. With vulnerable client numbers still on the rise, the industry faces an ever-tougher task in fighting these battles.