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Growth fears resurface but not all assets sound the alarm; Cost-conscious DFMs hold the line

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Mixed feelings

A bad day for markets yesterday has set tongues wagging, despite the fact that major equity indices remain in rude health year to date or indeed over any timeframe you’d care to use.

But this wasn’t a one-off in the strictest sense: as the FT’s Unhedged column points out, it actually replicated some of the patterns seen in recent weeks. We’ve discussed those patterns ourselves on a number of occasions: from the renewed fall in bond yields to the resumption of tech shares outperforming value.

In the former case, this descent has come despite US inflation prints repeatedly coming in ahead of expectations. We’ve examined that phenomenon a lot of late, too. But yesterday’s activity has less to do with inflation itself than the potential removal of a supporting pillar. Concern over a new phase of the pandemic has got investors worried again about the durability of the economic recovery.

As Mazars chief economist George Lazarias points out, one interesting aspect of this is the way that pandemic concerns “don’t seem ongoing, but rather work in a risk-on/risk-off pattern”.

The existence of the Delta variant isn’t news to anyone, and nor is its considerably increased transmissibility. On the assumption that the latter point makes its wider spread inevitable, the wave being seen in the highly-vaccinated UK population does not bode well for the rest of the world in the short-term.

Yet it’s only with an uptick in US case rates that investors have reacted. It may be the relative sanguinity is based on the hope that markets will simply pause for breath rather than reversing course - and there are still plenty of signs to that end.

Fed support remains the most important backdrop for all this. While riskier stocks have struggled – the Russell 2000 is down 10 per cent from its March highs – credit remains unmoved for now. SocGen points out that stocks with riskier balance sheets are struggling, but their bonds are yet to follow suit. That could be due to the central bank put, a relaxed attitude to long-term consequences, or a little bit of both.

Still delivering

In recent months we’ve also examined how DFMs have been content to chart a course between two poles, adding in value exposure but keeping plenty of tech or growth plays, too. That’s served them in good stead given the way style preferences have shifted back and forth this year.

The resilient performance of wealth portfolios also provides firms with another bulwark against the growing price competition in the MPS space.

The sight of the likes of LGIM launching models with a headline fee of 0.06 per cent hasn’t gone unnoticed. The Platforum consultancy is the latest to weigh in on these trends, and it notes that performance is helping discretionaries hold the line.

As a result, it ponders whether these low-cost options might serve to enlarge the amount of assets available to DFMs, rather than cannibalise existing offerings.

Those tempted to switch “probably won’t as long as their chosen DFM’s performance holds up”, according to the consultancy.

But it suggests the sector-wide decline in fees – aided by other factors like the removal of VAT and the greater use of passives in portfolios – might “attract advisers who have historically avoided these strategies because of ‘high’ DFM charges”.

The high growth rates enjoyed in recent months by on-platform models would seem to support this theory. There could be plenty more to come on that front.

No pressure to perform

The end of the scorned Priips ‘future performance scenarios’ may finally be in sight. Five years after concerns were first raised, the FCA is acting on its newfound freedom to deviate from EU regulations by suggesting that the calculations will no longer be required.

With Ucits funds having already gained another multi-year exemption from the Priips rules due to come into force at the end of this year, the change wouldn’t make much immediate difference in the open-ended world. But for investment trusts, whose boards have long bemoaned the shift, it could make all the difference.

Wealth managers wouldn’t put any faith in any kind of external future performance scenario. But ensuring that consumers don’t follow suit should help ensure fund vehicles stay a world removed from the kind of outlandish promises regularly made by unregulated investment providers.

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