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Wealth firms chop and change domestic equity picks; Tax changes loom into view again

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Domestic decisions

UK equities, in keeping with most asset classes, have enjoyed a pretty healthy 2021. Relative returns haven’t roared ahead – the FTSE All-Share has lagged US and European indices this year. But absolute performance has been strong, and value stocks’ late 2020 resurgence was enough to get many buyers looking more closely.

For wealth portfolios, that has meant relatively elevated levels of turnover. In 2020, the spring slump, the small-cap rally, and the end-of-year value surge meant some 60 per cent of DFMs either sold out of or bought into a UK growth fund during the period. Unsurprisingly, that’s well up on historical averages. 

This activity has continued into 2021. Some 38 per cent of DFMs turned over one or more of their UK model portfolio holdings in the first six months of the year, according to our fund selection database.

At the margin that’s meant a minor move away from the ‘Big Four’ funds, in favour of value propositions. But those four strategies continue to rank as the most popular in the UK equity universe.

In UK equity income, the trend is even more pronounced this year. The pandemic-induced dividend cuts of 2020 prompted 38 per cent of wealth managers to either buy into a new strategy or sell out of an existing one. The dividend recovery has now begun, but turnover has continued to accelerate: six months in, 31 per cent have either introduced or divested a fund in 2021.

Some of this is down to manager moves – as when Francis Brooke’s decision to step back from his Trojan Income fund prompted some holders to look elsewhere.

But beneficiaries have been few and far between. Threadneedle UK Equity Income, already the most popular pick in the space, has extended its lead this year. However, many of those selling UK income funds have either cut allocations, or concentrated exposures in existing positions.

Equity market leadership may have shifted several times in recent months, but tried and tested favourites still rule the roost for now.

Watching wealth

The much-trailed rise in national insurance contributions brought with it a fresh twist as rumour became reality today. Dividend tax rates will also rise by 1.25 percentage points, a move some saw as an attempt to head off criticism of the regressive nature of the NI hike.

That change has naturally led to commentators highlighting the attractiveness of Isa and pension allowances, which remain insulated from dividend taxes. Wealth managers, of course, don't need to be told twice on this front.

At the same time, the sight of a tax rise will set tongues wagging again over pensions themselves. It can't be long until the familiar ‘changes to pensions tax relief’ chatter starts to emerge once again.

So will further overhauls materialise? Over the past decade the government has repeatedly declined to validate those rumours.

It’s also opted not to make the kind of CGT or Aim reform suggested by the independent Office for Tax Simplification. What’s more, despite the talk of hard choices ahead, the Treasury may find itself the beneficiary of a windfall when the Budget rolls around at the end of next month.

All the same, the prospect of saving a few more pounds will doubtless be tempting to Rishi Sunak et al. CGT and IHT, after all, weren’t affected by today’s announcement – which arguably makes them prime candidates for future tinkering. So wealth managers would be forgiven for expecting more changes once October 27 arrives.




A banner moment for ETFs is around the corner: Morningstar data indicates the structure will soon overtake tracker funds in terms of AUM.

Global ETF assets sat at $8.7trn at the end of June, according to the FT: that’s just $132bn below tracker fund AUM, compared with a gap of $623bn at the start of last year.

But for professional selectors, the debate over what type of passive fund to hold is almost as tired as the active versus passive discussion itself. Most have long since made their decisions and moved on.

And for the vast majority, the old scare stories about ETFs threatening market stability have become a distant memory. As interest in thematic plays continues to grow – and even active ETFs start to hog the limelight – it looks like the only way is up.

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