Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.
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In February, after a hectic few months, DFM portfolio turnover went into reverse, verging on something akin to a record low. In March, however, there are signs that fund selectors have been translating thoughts into action once again.
There hasn't been a cascade of activity – but more DFMs than not opted to tinker with their portfolios last month. And if there was common thread linking most adjustments, it was the decision to lower US equity exposure. A third of firms in our sample, and two thirds of those who did make changes, actively cut back on US weightings last month.
Where did that money go? In the main, it was distributed to other parts of the equity universe. But it wasn’t the likes of bombed-out UK equity funds that were attracting money, for the most part. Instead, wealth managers’ recent preference for global equity strategies strengthened further. Several firms sought to increase their global exposure – perhaps of the view that fund managers could make the allocation decisions for them.
Of course, global funds typically have a fair whack in US equities, so this wasn’t a full-scale flight from the US. Nor was it, in the main, a shift to more value-oriented strategies. Many of the global funds attracting interest on the month were those that had done well during the rallies of recent years.
From widespread favourites like Brown Advisory Global Leaders, to less heralded picks like GuardCap Global Equity, the funds in question still have plenty of exposure to the likes of the tech sector.
Admittedly some DFMs did stock up on hitherto less popular plays, like Vulcan Value Equity. But for now, it remains a case of paring back growth positions rather than cutting them entirely.
For those who have been getting too exuberant on the US market, Bank of America last week presented five reasons to curb enthusiasm.
They start with the more ephemeral: the bank says its sell-side indicator is “less than one percentage point away from euphoria”, ie on the verge of a sell signal. More specific metrics are then provided: the bank's valuation framework, for instance, suggests annual returns of just 2 per cent over the next decade.
The analysts also note that the equity risk premium has fallen below 400 basis points for only the third time since the financial crisis – with both prior times being followed by double-digit drops for the S&P. The 52 per cent return for the index over the past 12 months also implies worse news to come, according to BofA. And all this is before valuations themselves are considered.
What are its proposed remedies? Rotation, rather than divestment. It points to smaller companies, cyclicals over defensives, and companies with a “secure yield” – suggesting the latter group tend to outperform regular high-yielders in times of trouble.
But all this may be jumping the gun, because professional fund selectors on these shores might disagree with the notion they’re feeling particularly bullish on the US. Most wealth managers are well aware that US equity returns have been extremely strong over the past decade, after all.
As the portfolio activity above indicates, fund buyers are now looking ahead with a little more caution, and for that reason analyses like Bank of America’s will look pretty familiar. All the same, while DFMs may not form the exact same conclusions as BofA, they too will remain cheerful enough for now.
Will Vanguard’s UK advice launch have much of an impact on wealth managers? The passive giant is targeting those planning for retirement, which is a definition broad enough to capture most accumulation savers.
But its service is strictly focused on investment advice, rather than the kind of full-scale planning that characterises most advisers and indeed wealth managers. That means it's not necessarily going to dislodge clients from their existing relationships. Sceptics would also note that most robo-focused services have had a tough time building scale in the UK.
Yet Vanguard does at least have deeper pockets than most. To that end, its 0.79 per cent ‘all-in’ fee is the aspect that has the most chance of ruffling feathers. The service doesn’t need to be successful in order to exert more price pressure on other players – it merely needs to exist as an alternative.