Asset AllocatorJul 21 2021

Wealth portfolios stick to their guns ahead of summer lull; Adviser uncertainty opens door for outsourcers

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Summer lull?

The events of late 2020 told some allocators all they needed to know about how to position for the year ahead: in short, adding in value exposure, and perhaps a bit of inflation protection, too.

That served them well in the first quarter of 2021 in particular. There have been a few posers since then – the government bond sell-off was one, the relative decline of EM assets and the slight return of European equities were others - but little to really rock the boat.

With credit holding up well and growth stocks showing their resilience, the main drivers of discretionary portfolios are still running smoothly. So it’s no surprise to see that last month was the quietest on record for changes to DFM model portfolio allocations, according to our analysis of DFM data.

The vast majority of discretionaries were content to let portfolios continue their upwards climb, with allocations either rebased to existing strategic weights or allowed to drift in line with the performance of their respective asset classes.

Now the summer months are in full swing, many wealth managers will trust that their strategies are in good shape to see things through until the autumn. The latest blip for risk assets won’t have unduly swayed them from this stance.

But if there was any trend to pick out from June’s portfolio data, it was a slight increase in average cash positions, which rose from 3.5 to 4 per cent on the month. That will likely prove a trend to follow if rockier times do lie ahead.

All this said, there has been more activity under the surface of many asset classes: fund selection changes aren’t quite as dormant as asset allocation shifts at the moment. We’ll examine some of those changes in more detail over the coming fortnight.

Room for growth

A wide-ranging study of trends in the UK financial advice market underlines the outsourcing opportunity is far from over for discretionary managers – providing they can get their own propositions right.

The 2021 benchmarking report from Model Office and Engage Insight reveals a considerable degree of uncertainty among advisers on a number of fronts.

One of these is client vulnerability, which has understandably risen up the agenda during the pandemic: half of respondents said they were unsure whether the needs of vulnerable clients were being met.

This degree of uncertainty is mirrored in areas with which DFMs are more familiar: 50 per cent said they were unsure of their own ESG strategies, compared with 31 per cent who described themselves as very confident and 19 per cent simply confident.

That harks back to the topic we discussed yesterday – the possibility that the pie can expand further for discretionaries.

The Model Office study finds that 45 per cent of respondents currently outsource to a DFM, with the remainder using either single strategy funds or a multi-asset solution, be that in-house or outsourced.

A potential fly in the ointment, for those eager to carve up more of this market, lies in advisers’ answer to the question of which area they see as most important for investment portfolios. Reconciling that with the wish to provide a fully-fledged ESG service may prove a difficult circle to square for DFMs.

A big buy-list

The final section of this newsletter is again dedicated to news of Martin Gilbert’s latest acquisition target. His AssetCo business is reportedly on the verge of taking a stake in thematic ETF provider Rize.

That follows on from a deal to buy Saracen in May, then the purchase of a minority stake in Parmenion earlier this month. At current rates the pace of acquisitions could soon verge on the exponential.

All this activity sheds a little light on the company's wider intentions. AssetCo has been described as a consolidator, but increasingly its strategy seems to be more of the pick and mix variety. A boutique active manager, a DFM/platform and a passive provider could in theory combine well, but the company’s decision to head down the minority stake route suggests it will continue to spread itself far and wide in future.