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Wealth firms take interest in new wave of tailored portfolios; Diverging views on diversifiers

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Custom made

When it comes to wealth management trends in 2021, it's not just market moves that have picked up where they left off last year. Both Brooks Macdonald and AJ Bell have scrapped VAT from their model portfolio services in the past week, following on from a series of rivals who have done the same in recent months.

Those changes mean the overall cost of investing continues to fall for those who use discretionary MPS. But customisation, rather than commodification, remains the ideal state of affairs for wealth managers – and on this front there are new developments now emerging in the US.

The talk this year is about direct indexing: allowing investors to more easily “pick and mix their stock holdings”, as the FT puts it. In 2020 US brokers scrapped trading commissions and introduced fractional share trading, opening the door for direct indexing to become a reality. High-profile acquisitions quickly followed.

This is a trend which is clearly still some way from fruition – even in a market which has traditionally been a few years ahead of the UK. But in a world where ESG considerations are paramount, the ability to fine-tune portfolios in this way is only likely to grow in importance.

What would the impact be on these shores? In the US, Credit Suisse analysts think direct investing will, perhaps inevitably, “be dominated by financial services firms with D2C efforts”. Over here, there would surely be room for wealth managers to get in on the act. Not all clients want to do things for themselves.

Unlike robo-advice, which has arguably floundered due to a lack of demand, the big impediment to direct indexing is whether providers will have the capability and scale to offer such services. Clients will always be interested in the potential for greater specialisation, and direct indexing in theory offers a way to do that at a lower cost. It remains to be seen how effectively it can be put into practice, but bigger UK names will likely be keeping a close eye on that progress.

Fool's gold?

Ruffer’s unusual move at the back end of 2020 – to take profits from gold and buy Bitcoin – tapped into a debate that’s becoming increasing prominent. The cryptocurrency’s rapid rise – notwithstanding yesterday’s dramatic slump – has led more than one commentator to ask whether it could replace bullion as a store of value.

While the question is being asked more regularly, the answers remain sceptical at best. That will come as little surprise to the majority of investment professionals, who are still doubtful of Bitcoin’s attractions. Yesterday’s drop will only have reinforced those suspicions.

On the other side of the equation, opinion remains split. Gold had a decent rally of its own last year, but now DFMs are positioning for an improving world economy. That’s led to some conflicting views.

Smith and Williamson, for instance, has added BlackRock Gold & General to its portfolios in preparation for the return of inflation. Hawksmoor, by contrast, has cut back its own gold position as it shifts to a slightly more risk-on stance. The moves stand in contrast to one another despite the underlying theme – things are getting better – being the same.

That speaks to the hard-to-define role gold plays in asset allocations: it’s generally agreed to be a diversifier, but what it diversifies against is harder to pinpoint. That’s a poser that’s likely to crop up more frequently as wealth managers look more closely at their alternative assets this year.

Going for a song

Another asset that divides opinion is the Hipgnosis Songs investment trust. The company’s regular announcements about its acquisition of song royalty rights make for easy headlines, and have also caught the eye of plenty of fund buyers.

Several now include the strategy in their model portfolios or unitised funds, according to our asset allocation database – largely because of its mooted qualities as a diversifying asset.

Last week Stifel added its voice to those sceptical of the trust’s strategy, asking questions over valuation methodologies and cash flow. A countervailing view soon emerged from JPM Cazenove, which said it remains overweight. The desire for uncorrelated assets has undoubtedly given a tailwind to vehicles like Hipgnosis, but fund selectors will recognise that several alternative investment trusts investing in esoteric assets have gone awry in recent years. For now, the trust has still got wind in its sails – and its backers look happy enough to stay on board.

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