After the Hayne Royal Commission many advisers decided to steer away from large dealer groups in favour of becoming self-licensed. In the last six months, however, that trend has taken an abrupt turn.
While known for being the flagbearer for financial product providers, the Financial Services Council is now making serious inroads into the financial advice sector.
More questions than answers despite the macro consensus
Conversations on investment matters are wide-ranging. Many enjoy the ethereal world of big picture debates. Identifying these in the long run has been critical, but only a handful matter. Interest rates are the perennial, though rarely has the consensus been right. Over much of the past decade the expectation has been that rates will inevitably rise; they did not and COVID was the nail in the coffin.
Inflation has been the poor cousin. There have been persistent outbursts on looming price rises given cheap money and unsustainably low-cost wages. These were slapped down by new cheaper technology, disintermediation of global labour and weak pricing power.
Nor has GDP mattered as its backward-looking data had little information for investment assets. Yet few reports don’t start with some comment on economic growth without much in the way of a hint as to its consequences. By way of example, the budget has its forecasts for growth with domestic demand underpinning a recovery. This not exactly new news.
The vast majority of investment advisers exited duration in fixed income far too early foregoing simple, low volatility, returns. The cloud of inflation may have imposed an insurance policy via a token holding in an equity value strategy, long time a drag against an exuberant growth driven index. Burnt by this experience, few are prepared to take a big bet on inflation now.
Presumptions on country GDP patterns may have ignored the structural nature of regional indices and disruptive technology. US economic growth was relatively sound, but the outperformance of the S&P 500 had many culprits, GDP was not the primary influence.
Do advisers make decisions based on macro data? Today there is again an inclination to add a value bias to equity portfolios. Pressure on interest rates, much comment on inflation and the extreme differential to other determinants of equity factors make it a relatively easy sell. Yet if inflation does come through and persists, a stagflation outcome may be in the making, unfriendly to all equities in an absolute sense.
As critically, how does one add a value emphasis? Managers can be sideswiped by a few stocks in an investment style that has no recent history in portfolios. A systematic manager may be a better solution, lower cost and able to adjust to nuances in the value screen to avoid long term stock biases.
Duration now? This one does feel far too late, yet could be back in the fold earlier than expected if a rate rise tempers growth expectations. Further, steeper curves can be productive for bond managers.
Today, GDP is muddy water given dislocation in the last year. Yet a strong kickback in countries such as the US and UK may not mean they are attractive relative to other regions. Internationalisation tends to swamp domestic emphasis.
Are dividend stocks set for a come-back? What value bias makes sense to a portfolio? If inflation does rebound, for how long, at what level and which equity sectors will benefit the most? It may not be banks given their constrained capital, cost ratios and competition.
In fixed income, what 10yr bond yield should be considered investable? What will be realised to make space for them?
There is oft talk of a risk budget, yet few implement it. If clients had a better grasp of financial markets, managing risk may be the main talking point. Macro talk would centre on the determining where the economic risks lay and how correlated they are. Micro then unfolds into ways to manage those risks rather than ignore the macro setting by steaming ahead for returns without consequence.
