Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.
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Understandably enough, investors of all stripes are still wedded to the belief that equities represent the best way of making money in tough times. All the same, many DFMs are now choosing to shun several of the world’s most high profile equity markets.
Yesterday we discussed the diverging fortunes of US and UK equity allocations within wealth firms’ balanced portfolios. But one thing the two regions do have in common is that, between them, they still make up the bulk of the typical discretionary’s moderate equity allocations.
As a result, European, Japanese, EM and Asian equity funds tend to get only a limited look-in at best.
That’s understandable enough in moderate portfolios, where many different asset classes are competing for attention. What’s more surprising is that even the most adventurous portfolios now tend to shun these regions.
We looked at a sample of more than 30 high-risk portfolios, typically named adventurous, aggressive or, most pertinently, global equity. Less than a third of these offerings held 10 per cent or more in two of the above regions.
On top of that, more than two in five DFMs didn’t breach the 10 per cent threshold in any of those areas. Their European, Japanese, EM and Asian equity exposures were all in the single digits.
Instead, wealth firms are content to up risk by simply adding more to their UK and/or US exposures – as well as going down the thematic or global equity route. It’s not quite the case that regional equity holdings are dying out, but they’re certainly no longer a material part of many wealth portfolios.
Of the regions mentioned above, Japan was the most notable laggard. Just 13 per cent of our sample have invested more than a tenth of their most aggressive offerings in Japanese funds. And yet, of late, the country’s equity market has started to sparkle once more.
As the third quarter comes to a close, Japan is sitting pretty: MSCI Japan has outstripped all major peers other than the EM index over the past three months. Notably, this lead has been established over the past eight weeks: other stock markets (including emerging equities) have started to wobble, but Japanese shares have held firm. And its small-cap index has continued to power ahead – which, as we noted at the start of the summer, has been of particular benefit to one fund.
There’s been an added bonus of late: as nervousness grows elsewhere, the Japanese yen’s safe haven qualities have returned to the fore. That’s given an additional, artificial boost to UK investors' returns.
Of course, currency movements are notoriously unreliable (putting aside the unfailing aid provided by sterling in recent years). And the problem for discretionaries is that they view Japanese equities as much the same. The arrival of Yoshihide Suga as prime minister has reignited hopes of structural reform. But buyers have been here many times before, and they’ve been let down by Japanese positions more than once in recent years. The summer fillip will be welcome for those who do still have material exposure, but even they won’t be counting their chickens for some time yet.
Mark your own work
Earlier this month we said there was unlikely to be an imminent definitive answer from the taxman on the question of charging VAT on model portfolios. But in the absence of such a decision, HMRC appears to have thrown the ball back into wealth managers’ court for now.
Brewin Dolphin has today become the latest to stop charging VAT, saying it’s been permitted to self-assess whether or not such a tax should be charged. That paves the way for many more firms to do the same. The one remaining issue is whether DFMs will be given refunds on charges previously paid - and if so, whether these refunds will then be passed on to investors. That might cause some problems for administrators, but the overarching result – that end-investors will pay less for their investments in future – is a welcome boost for all concerned.