Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.
Forwarded this email? Sign up here.
It’s easy to call the start of a price war, but much harder to define when one’s reached its end.
In the investment world, these skirmishes have often been bandied as a “race to zero”. Many have been underway for a long time now. But there’s plenty of room for manoeuvre on the sub 1% battleground, and several parts of the market are still a long way from the lower bound.
In wealth managers’ own world, this line is drawing nearer: we’ve spoken on several occasions this year about the ‘new normal’ in model portfolio pricing. But this is an exception to the rule: headline MPS charges don’t take into account underlying costs, and more sophisticated portfolios remain pricier.
So the race to zero is still most visible among passive providers, whose simple offerings, deep pockets and sizeable economies of scale have meant the sight of a 0.05% tracker or ETF fee is far from rare.
Yet the FT reports today there are signs of a reversal on that front in the ETF universe. Average costs have stopped falling in the US and started to creep higher in Europe and other regions.
Look at the shape of the market, and there are a few potential reasons for this. One is an acceptance that the biggest players have long since cemented their dominance of the mainstream passive investment universe. In the UK, the likes of Vanguard, iShares and L&G continue to compete with one another, but there remains enough pie for them all to share, and prices ultimately can’t go much lower.
When it comes to ETFs, this fact also speaks to another possible factor in the price reversal. Other providers are having to branch out to attract customers.
That typically means factor or thematic products, a move that’s proven well-timed of late given investors’ growing preference for such investments. The growing interest in using ETFs to play esoteric themes – be it cybersecurity, clean energy, or something else – means paying heftier prices than for plain vanilla passives.
A relatively subdued June for risk assets has translated into a similar story for UK fund flows – but there are one or two items, as ever, that stand out.
Tellworth UK Smaller Companies sat atop the inflows table for the month, according to Morningstar estimates, courtesy of a near £500m inflow that doubled the fund’s overall assets under management.
And while UK small caps have delivered for investors this year, not all widely touted sectors or themes have done quite so well.
In a health-conscious time, the failure of healthcare shares to keep pace with the wider market has puzzled some analysts. But it’s still a theme that investors are keen to back: the L&G Global Health & Pharmaceuticals Index Trust, which remains many DFMs’ go-to option in the space, has now taken in more than £400m in the past two months alone. That's pushed net assets past the £1bn mark for the first time.
A more conventional global favourite, Fundsmith Equity, has managed to outperform the global index again this year. That’s meant a belated return to inflows for the strategy, which had its best month since November for new money.
On the bond side of the equation, however, two wealth manager favourites were on the out last month. TwentyFour Monument Bond, a perennial pick for model portfolios, saw a material outflow for the first time this year, of £50m.
That’s no great shakes, but more eyebrow raising was the roughly £200m withdrawn from the Allianz Strategic Bond fund – its first monthly redemption in more than three years. The fund’s caution on credit and relatively sanguine take on rates has seen performance dip this year. But the events of last week may have given sellers cause to regret their decision.
This week brings another set of inflation prints in the US and UK – but at this point, it’s hard to see what they can add to the price growth debate.
The bar is set relatively high in both the US – where prices are expected to have risen 4.9 per cent year on year in June – and the UK, where price growth is expected to come in at 2.2 per cent. In both cases, the perception that inflation expectations are already priced in might prove hard to shift.
Whether or not investors do turn their attention to the possibility of a structural shift in some prices – or whether they believe the ‘transitory’ element remains the most important component – is what will define discussions in the months ahead.