DFMs' income portfolios struggle to deliver; Allocators' consensus bets put under new pressure
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Trail of destruction
The worst may be over for UK income stocks, but more pain is still to come for DFM income portfolios.
Back in May, we noted that those strategies were yet to feel the effect of the dividend cuts being implemented across the market. Almost six months later, and the impact has started to filter through. The average yield on wealth managers’ income model portfolios has fallen from 3.7 per cent to 3.2 per cent over that period.
The delay’s understandable, given these are trailing yields – calculated based on the average payouts made by funds over the previous 12 months. But that does mean there’s more bad news around the corner. With some portfolio yields already as low as 2.4 per cent, it’s likely that the average income portfolio will pay out less than 3 per cent by the time the year is out.
That’s perhaps of less concern to clients, given the payments they actually receive may shortly start to rise again. But there is another issue for wealth managers to consider. The average yield on a balanced portfolio stood at less than 1.5 per cent at the end of September, down from 1.75 per cent in April. Many now barely offer more than 1 per cent.
Historically, the ‘balance’ offered by these portfolios has been as much about growth and income as it has about equities and bonds. With payouts at such negligible levels, more pressure is being placed on capital growth than ever before. And a low but growing level of income may not be enough to offset that emphasis for many months yet.
Trouble at the top
A nascent second wave of Covid-19 is putting pressure on risk assets again this week, but the sectoral winners and losers aren’t necessarily following received wisdom just yet.
For evidence, attention inevitably turns to price action across the Atlantic. The Nasdaq may again be displaying a little more resilience than its S&P 500 counterpart, but the ongoing Q3 earnings season has complicated investors’ other favourite plays.
Yesterday, disappointing results for Eli Lilly and Pfizer put particular pressure on the healthcare sector. And today’s moves are also putting strain on some parts of the stay-at-home trade. Both Mastercard and Visa report earnings today: the former has notably said that online retail spend has risen to the highest levels yet seen in 2020 over the past couple of weeks. But it’s Mastercard's results themselves that have disappointed, on both the earnings and guidance front.
That’s sent shares lower in pre-market trading, which won’t be of particular help to fund managers: both Mastercard and Visa rank among the five biggest global equity manager overweights, according to UBS analysis.
Yet year-to-date returns for both shares are underwhelming. As with so many other companies, the pair enjoyed a sharp rally in the aftermath of the March slump. But both stocks are now back in the red for 2020 as a whole – a far cry from the performance of the Faangs. The pandemic has prompted even more conversations about a societal shift away from physical money, but payment processors have struggled to cash in on this move as it stands.
US success
As the big continue to get bigger in the world of asset management, thoughts turn again to the size of the average company. In fact, in the UK, not much has changed over the past half decade: firms with more than £100bn in assets make up 11 per cent of the market – as defined by those firms who are members of the Investment Association – compared with 8 per cent five years ago.
That’s offset by a fall in the £50-£100bn category, whose representation has dropped from 10 per cent to 7 per cent. Almost half of firms continue to reside in the £1-15bn grouping, though there are signs that more are rising up to the DFM sweet spot of up to £25bn in assets.
Globally, there’s not much difference either. Figures published this week by Willis Towers Watson show the top 20 asset managers now manage some 43 per cent of all AUM, up from 41 per cent a decade ago. But what has changed markedly is the share accounted for by US groups: their share has risen from around 50 per cent to almost 60 per cent over the past decade, and 15 of the top 20 are now US managers. That trend's highly likely to continue in the years ahead.
