Contagion risks put the focus back on diversifiers; A new salvo in the model portfolio price war
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How, not how much
The Evergrande crisis means investors are once again turning their attention to Beijing. But China's no longer the only c-word on their minds: contagion is the worry of the day.
While the Chinese government is odds-on to backstop the property sector et al, the knock-on effect has already begun. Commodities are down, as are markets as a whole in the UK, Europe and US.
These are very much ripples rather than waves for the moment. Still, they feed in to wider concerns over what lies in wait in the fourth quarter – be that stimulus withdrawal, slower than expected growth, significant supply shortages or some combination of the three.
Events like these do get allocators pondering. As the FT’s Unhedged newsletter notes today, market downturns bring career risks for portfolio managers, regardless of whether or not equities renew their upwards path.
For DFMs, things are a little different. There is a degree of professional risk involved – those charging premium prices might find poor performance is the final straw for cost-conscious adviser clients.
But the actual discretion afforded to most DFMs is subject to certain limits: liquidating a portfolio isn’t usually an option, and broader asset allocation calls are increasingly governed by portfolios’ risk-rating frameworks.
All of which means the onus in tough times is how wealth managers diversify the non-equity parts of their portfolios, rather than the extent to which they cut back on risk assets. In recent weeks we’ve discussed the ways in which some managers are expressing their caution; tomorrow we’ll take a closer look at broader trends on this front.
VAT's life
The sight of wealth managers removing VAT charges has become commonplace over the past 12 months.
In years gone by this was a murky area for wealth firms: absent firm guidance from HMRC, the industry took the view that it was better to be safe than sorry.
Tatton’s annual results last summer changed all that: the company mentioned, almost as an aside, that HMRC had agreed model portfolio services were exempt from the charge. Many more DFMs then followed Tatton in scrapping VAT – though HMRC is still said to be approving those changes on a case-by-case basis.
Others are now going a step further: Thorntons Investments said last week it was “among the first” to remove VAT from its Aim portfolios as well as its regular models.
The company implies it sought clarity from the taxman before making this move. All the same, it’s calling for “more definitive guidance surrounding VAT when it comes to Aim”.
That feels unlikely given HMRC’s predilection for ad-hoc assessments. All the same, having successfully tested the water with their mainstream propositions, wealth managers will be keen to follow suit with their more specialised portfolios.
The continued pressures being exerted by price competition means every few basis points could be crucial. And recent history suggests that cutting prices, by hook or by crook, could open more doors for these offerings, too.
Going backwards
Passive ESG options have come in for fresh criticism this month, courtesy of a paper that claims climate-focused ETFs are engaged in “the most dangerous form of portfolio greenwashing”.
There are many who are sceptical of passives’ sustainability claims, but the paper has a slightly different take to most.
One ESG approach is to invest in companies that aren’t necessarily sustainable per se, but which are making efforts to move in that direction. The study backs this approach, but says many passives are actually operating contrary to its aims.
As the FT reports, it finds that “35 per cent of companies that have worsening environmental performance are rewarded with an increase in weight”. The accusation is that this happens because funds prioritise a company’s overall ‘green’ score, rather than climate metrics.
In short, given the absence of standardised terminologies and methodologies – still a pipe dream when it comes to sustainable investing – the onus, once again, is on fund selectors to have a clear understanding of the strategies they hold.
