Dan Jones  

Preparing for a correction

Dan Jones

Let’s be honest, we’ve been talking about the possibility of a big correction in risk assets for some time now. And that first person plural encompasses not just journalists, but a range of fund managers and other market participants, too. 

Assertions of this kind were made after three, four, five years of the current bull market and beyond. We’re now nearing year 10, and equity valuations, at least, still keep grinding higher. 

In truth, the negative predictions have become a little harder to find of late. It’s got to the point where even the doomsayers have gone a little quiet. Given the received wisdom about the last bear capitulating, that’s unlikely to prove a positive sign. 

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This isn’t a finger-in-the-air column that tries to predict when the rocket will fall back to earth. In any case, advisers will say this tipping point matters less than tangential issues such as communication and the right portfolio construction.

And yet, even if we take a step away from investment markets, the topic still has relevance. It’s worth remembering how closely connected many of advisers’ favourite bugbears are to the illusion of market stability. Consider some of the other increasingly repetitive discussions of the past half decade: on robo-advice, the new breed of vertical integrators, or even the success of the original integrator, St James’s Place. Most intermediaries will have grumbled about at least one of these over the years. 

But the reason these arguments are going round in circles is that they’ve long been playing out against a benign backdrop.

It’s easy to look past a lack of human interaction, pricey propositions and opaque structures when the returns are rolling in. When they aren’t, every statement starts to be scanned a little more closely. 

Advocates of the trio listed above will mount their defences in the same way advisers might. Yet there’s only so far that a slick interface or good customer service can take you.

That statement is universally applicable, of course. The upheaval would not only be confined to the independent adviser’s current competitors. A lot has changed in the advice industry since the last downturn, particularly when it comes to pensions. 

Can centralised investment propositions withstand such an environment? How will the decumulation choices of the past four years look if pound cost ravaging makes itself felt more forcefully? These questions will have to be answered sooner or later. 

Some look like they’re building their fallout bunkers already. Many in discretionary fund management – a sector that would arguably be first in the firing line – are, believe it or not, starting to keep a closer eye on charges. That’s clear from the number of passives or direct equities now being used in model portfolios. 

Smart move, you may think. Except many such decisions have been driven by Mifid II transparency requirements, forcing intermediaries to disclose charges in full for the first time, rather than a consideration of what happens if returns dry up.