Asset AllocatorJun 22 2021

Euro 2021 captures wealth managers' attention; MPS ranges prepare for more competition

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Euro 2021

The Euros are in full swing for the first time in three years, and wealth managers' own interest in the continent is also back on the agenda this summer. We've discussed the prospects for a European equity revival on a couple of occasions in recent months, and the evidence suggests wealth managers are now taking a closer look.

Our latest analysis of model portfolio asset allocations shows several discretionaries added to Europe in May for the first time in months. Exposures to European equity funds remain below levels seen six months ago (let alone six years ago), but interest is beginning to return. Allocations rose for the third successive month in May, and at the fastest rate of the year.

The move’s based in part upon performance: the MSCI Europe has beaten all comers over the past three months with a return of 8.4 per cent in sterling terms.

That’s only just ahead of the returns posted by the S&P 500 (7.7 per cent) and the MSCI World (6.9 per cent). In Europe’s favour is investors’ sense that now is an appropriate time to diversify. Allocators will view any outperformance, however meagre, as a sign they’re knocking on an open door.

This isn’t simply a case of shuffling regional equity positions. Many wealth portfolios have given themselves a little more risk budget to play with: the biggest shift in May was a pullback from fixed income positions.

Bond weightings have dropped 1.5 percentage points over the past couple of months and now sit at their lowest levels since the pandemic. But this isn’t solely a story of adding risk – some DFMs have opted to increase their alternatives or cash positions instead.

Those moves come despite fixed income continuing to hold up well. Government bonds and credit continue to confound the doubters, and appetite for inflation-linked debt has been elevated for several months now. Some wealth portfolios think at least one of these trends has now run its course.

Going down

New light has been thrown on the price pressures in the model portfolio space, courtesy of two new reports on the sector. Both are well timed, given the arrival of LGIM’s low-cost range earlier this month, and both have broadly familiar conclusions.

NextWealth predicts this is the beginning of a “price point shuffle” as providers re-examine their fees, and there’s good reason for that.

Its research finds that the fastest growing DFMs over the past 18 months all have lower cost MPS fees. Crucially, underlying fund costs are also at the bottom of the scale for the fastest growing groups.

That’s partly because of the growing interest in passive models. But it’s also likely due to the types of customer being targeted by DFMs. As the Platforum notes, it’s become tough to expand private-client businesses in recent years, given referrals are increasingly hard to come by.

That leaves distribution to financial advisers. Here, growth remains healthy: on-platform model portfolio AUM rose by 25 per cent last year, according to the consultancy. Off-platform model AUM rose by 40 per cent, albeit from a lower base.

The issue is that this part of the market, as wealth managers already recognise, is much more price conscious – and that means all-in fees as well as headline MPS charges. All of which leads to the suspicion that price competition is only going to ramp up further from this point.

Private irritation

Costs aren’t everything, but grumblings about price are never far away no matter where you sit in the investment chain. UK fund managers, for example, are currently up in arms about the way merger and acquisition activity is being conducted.

Specifically, they’re annoyed at private equity buying up their stocks on the cheap. In managers’ minds, every time PE swoops in to snap up a UK company, that’s several years’ worth of prospective price appreciation taken away from them.

But while private equity deals are often bad for fund managers, as well as for the companies themselves, their prominence is a fact of life for a high-profile market that still trades at a considerable discount to many global peers. There’s only so much resistance boards can put up in the face of structural headwinds, particularly if their share prices have shown little sign of appreciation for several years. That suggests more managers are likely to be disappointed in the months ahead.