In the world of equity investing, 'UK' was a dirty word last year. But what key trends are emerging in the wealth market in 2018?
UK equities were out of favour with wealth clients in 2017 and the IA UK All Companies sector regularly featured as the worst-selling retail sector, according to Investment Association data. 2018 is proving to be a more volatile year and UK clients are making key asset allocation decisions, with opportunities harder to find.
Yet with many markets looking expensive on a CAPE (cyclically adjusted-price-to-earnings) basis, I've learnt from my regular meetings with clients that many are now turning their attention to the domestic market, with a number of selectors increasing UK positions in the first half of 2018.
In the world of equity investing, 'UK' was a dirty word last year
Others are deciding to not allocate geographically, preferring instead to 'buy global' and leave the decisions to the fund manager. One interesting uptick has been the increased use of strategic bond strategies, with allocators tending to be investing in short-dated bonds. Inflation has also been a key topic, as has the direction of the US dollar, the potential implications of which for emerging markets are very much in focus!
Absolute return investing is another an area that is proving popular, as clients look to de-risk their portfolios. However, whilst cash can offer a safe place to park money in the short term, headline inflation can have a drag, whereas a portfolio that uses active asset allocation and derivatives arguably has more flexibility to adapt to changing market conditions.
Disruptive technology is a term being commonly used and clients are now looking at emerging themes such as robotics, AI, battery, cyber security, e-commerce and logistics. Thematic investing is certainly proving a key talking point with clients.
Last but not least, property still has a place in many clients' portfolios, and whilst closed-ended vehicles are being favoured over open-ended ones, the asset class has provided diversification and exposure to alternatives outside of London office space.
And regarding UK equities and market volatility more widely, perhaps Warren Buffett's view should remain at the forefront of our minds?
Physical gilts have generally offered a yield pick-up over equivalent swap-based exposure. Yet this premium has declined over the past two years as pension funds have continued to invest heavily in gilts to match liabilities. Let's consider how much this premium might have to fall for investors to swap bonds for swaps.