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The bond sell-off began in earnest last month – and by the end of it, equity investors were also paying close attention to government bond yields.
But few DFMs felt the need for a rapid response. February saw the fewest number of notable changes to balanced portfolios for six months, according to our asset allocation database. A sign that wealth managers are blasé about bonds, or are there other factors at play?
After several months of elevated portfolio turnover, prompted by vaccine breakthroughs and hopes of economic recovery, taking a breather last month would have felt like the right thing to do.
For many, then, the inclination to sit back and see what happened was higher than usual.
Accusations of complacency are harder to stick: while gilt yields rose throughout the month, it was only in the final days of February that the rise in US Treasury yields proved material enough to worry equity markets. It may be that the reverberations for discretionary portfolios, such as they are, become more apparent once March’s data is in.
For the handful of DFMs who did adjust bond exposures in February, it was credit rather than government bonds that was in the spotlight. High-yield has proven resilient once again in recent weeks, but that didn’t stop a couple of wealth firms paring weightings here.
Of course, credit typically accounts for a much larger part of portfolios than government bonds nowadays. But even those who do still run double-digit sovereign debt positions held firm in February. It will have taken a steady nerve to maintain that stance this month.
Like everyone else, we’ve discussed the rise of the retail investor on more than one occasion in recent weeks. Yesterday we pondered whether the new breed of younger investors might have developed a degree of resilience due to their experience with cryptocurrencies.
Shared notions of buy and hold aside, the day-to-day experience for Bitcoin buyers is pretty far removed from the traditional investment journey. Elevated volatility is part and parcel of that experience. Those who eventually move on to more considered portfolios might find the whole thing more boring – but they’re also less likely to be frightened away.
Or so the theory goes. Research published by the FCA today contests this, to an extent. A survey of 500 direct investors found 59 per cent of those with less than three years’ experience said a significant investment loss would have a “fundamental impact on their current or future lifecycle”.
All the same, there was evidence (were it needed) that many are buying cryptocurrencies and trading currencies just for kicks. Almost 40 per cent of respondents did not, in the words of the FCA, “list a single functional reason for investing in their top 3”.
Needless to say, this combination of boredom and real financial risk isn’t a positive one. Wealth managers will already be aware that large portions of this cohort are a world away from their own client bases – in demographic profile as much as in attitude. But the signs of implicit desperation among this younger group are arguably more prominent than many suspect.
For years now, there have been rumours of reforms to pensions tax relief, only for nothing to happen when push came to shove. Today, the government’s so-called ‘tax day’ confirms it’s not just these reliefs that enjoy this special status.
That's because wealth managers might now think the same thing of capital gains taxation: a few weeks ago, speculation was rife that CGT reform would be included in either the Budget or in today’s raft of consultations. In the event, nothing of the sort occurred.
With inheritance tax standards undergoing only the most minor of tweaks, wealth managers can also breathe easily over their Aim portfolios – the tax status of which had also been called into question in recent years.
As it stands, all these rumours have proven more of a boon than a blow to the sector, given they tend to encourage clients to make the most of things ‘while they still can’. Once again, they’ll now have a while longer to do so.