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Asset Allocator

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Markets point to long winter for wealth portfolios; DFMs' mixed views on the specialist fund surge

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Mixed signals

Many allocators will be forgiven for looking forward to a time when a single tweet doesn’t move markets. For now, that’s far from the case. And while most wealth managers will happily look past short-term moves, events overnight could yet have long-term consequences for their portfolios, too.

Last night, president Trump first seemingly ended hopes of a stimulus package being agreed in the coming weeks, only to suggest an alternative a few hours later. Investors reacted accordingly: first selling US shares, then buying them back once the door to a deal was seemingly reopened.

Although the messages effectively evened one another out, some conclusions can be formed nonetheless. Joe Biden is looking increasingly likely to win the White House next month, but his increasing popularity in the opinion polls hasn’t affected markets all that much. Investors appear much more concerned about the fate of a stimulus package than the prospect of a new president.

Also of note is that tech stocks fell just as much as the wider market when the deal looked to be dead overnight. Allocators won’t read too much into that at this stage, but it could be a warning that no part of the US market will escape the pain if fiscal firepower doesn’t emerge.

And there is a cliff-edge scenario emerging for the US. Stimulus of one kind of another looks likely at the start of 2020. But there’s a growing risk that nothing will happen until that point. That would leave US consumers fending for themselves without the aid of the Cares Act, at a time when the risks of a second wave of Covid-19 are on the rise. It might prove a long winter for the world’s largest economy - and the portfolios that have increasingly relied on its companies' share prices to outperform.

Broad brush

Further confirmation that 2020 has brought a boon in thematic investing comes from Global X, the ETF provider owned by Mirae Asset Management. Its Q3 report finds that assets in thematic ETFs stood at almost $59bn by the end of the third quarter – up a remarkable 42 per cent since Q2.

Having broken the $20bn mark at the start of 2018, it took more than two years for such products to reach $30bn. Now that figure has doubled in the space of just nine months.

The main driver, inevitably, is technology, which has accounted for the lion’s share of growth so far this year. But healthcare and ESG have chipped in as well.

How does this compare with wealth managers’ own preferences? As we discussed earlier this year, uptake of specialist equity plays has been on the rise in 2020 – even if you discount the wider push towards ESG strategies. Dedicated tech and healthcare funds are appearing on more and more buy-lists, typically at the expense of regional equity funds.

That rotation hasn’t entirely been in favour of thematic plays, however. Our asset allocation database shows wealth portfolios are, even now, more likely to look to broad-brush global equity funds than specific themes.

That’s particularly the case in mainstream portfolios. Of the 6.5 per cent weighting now afforded to global or specialist equity funds in the typical balanced portfolio, two thirds is comprised of global equity or global income strategies. Sector-specific funds still have a long way to go if they’re to make a permanent mark on DFMs’ offerings.

Deriving no value

The FCA’s ban on crypto-derivatives, announced yesterday, will be welcomed by wealth managers. Like it or not, consumers do consider such offerings to be investments – there is a risk, when those investments go awry, that the conventional retail investment industry is written off by those same consumers.

So drawing a clear line between regulated and unregulated products is worthwhile. Crypto-advocates have claimed that the FCA is the only major Western regulator to have clamped down in this way, and that it did so despite 97 per cent of consultation respondents opposing the ban. These look more like points in the watchdog’s favour rather than a case for the defence.

The next step is more difficult: regulated, sensible investment will never look as superficially attractive as the promise of a quick return. But attracting the next generation of clients remains a key challenge for wealth managers. Now, at least, they will have one fewer type of competitor to deal with.

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