Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.
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At a time when equities are wobbling, and fears of a stock market crash are at a record high, wealth managers would expect diversifiers to be doing their job.
It doesn’t always work out that way, and gold is the latest case in point. The price of the precious metal has fallen to a two-month low amid the latest flight from risk assets.
The big driver – other than the big run-up bullion enjoyed over the summer – has been the renewed strength of the US dollar. The dollar index is now 2.6 per cent higher this month: it’s this haven, rather than precious metals, that's attracted interest in September.
Of course, there are other, sometimes contradictory catalysts that can also help gold prices. But US real rates haven’t really gone anywhere over the past couple of months; there’s little indication that inflation expectations will jump higher any time soon.
Fund buyers have been doing some profit-taking themselves in recent weeks, but UK selectors appear to be a little at odds with their peers on the continent. European fund flows for August show the first net redemption from gold funds since last November. But this was largely driven by continental products, according to Morningstar. The provider says the euro’s strength against the dollar “might have contributed to reduced gold demand in Europe”.
There was less evidence of a similar trend on these shores, despite August also seeing sterling hold up well against the greenback. Invesco Physical Gold, one of the most popular gold products with UK discretionaries, according to our database, bucked the trend by posting net inflows on the month. But if gold keeps falling at the same time as tech, domestic allocators might start to rethink their positions, too.
Investec’s launch of an on-platform managed portfolio service charging 0.2 per cent is further evidence that MPS prices are only heading in one direction.
There’s a way to go on this front: though a handful of DFMs now come in at or below the 0.2 per cent mark, adding in underlying active fund costs and Mifid transaction fees means total charges still amount to around one per cent. But the point at which models start reliably undercutting conventional multi-asset strategies is drawing closer.
The pressure on pricing is borne out of greater competition all round. The Investment Association’s annual fund management survey, published today, addresses some of the statistics we’ve flagged over the past 12 months: specifically, the continued redemptions from DFM coffers.
Those outflows have persisted even at times when overall fund flows are positive. As noted in the past, a fair whack of this money is likely being shifted in-house from direct DFM to on-platform arrangements.
The IA also suggests that discretionaries moving from funds to segregated mandates could be having an impact – given its figures only track money flowing into and out of the former.
But this isn’t the only part of the market that’s seeing structural shifts. A move away from Isas will have less direct impact on wealth managers, but should be given some attention nonetheless. Part of this is because of a greater focus on pension arrangements. But, as the IA survey notes, the amount of money invested in Isa wrappers fell some 99 per cent to just £14m last year. A rebound of sorts has been evident in 2020, but questions about how clients are investing their money should remain at the forefront of DFMs’ thinking.
The IA study has also attracted headlines for charting the latest falls in UK equity allocations. The average UK retail investor now has 14 per cent of their assets in domestic equity funds, down from some 35 per cent in 2005. For institutional investors, that proportion has fallen from 48 per cent to 30 per cent over the past decade. The reasons for those shifts lead little further explanation.
DFMs are no different. Their own UK equity allocations are now also below the 20 per cent mark, according to our analysis; in the past year alone those positions have declined by several percentage points. That equates to a bigger short-term move that those recorded for either retail or institutional investors. Yet discretionaries’ readiness to make such calls at relatively short notice could also mean they soon become an outlier: if and when the bounceback arrives, it’s likely to be wealth managers who lead the charge.