Written by Kevin Okell on Thursday 14 March 2019
“Trump hits China with $200bn tariffs” ran the headline late last year. Predictions of the impact on Chinese stocks were widespread and anyone invested in the Shanghai Stock Exchange had cause to feel worried.
But what would a typical UK consumer with retail investments made via their IFA expect the impact to be on their own portfolio? Let’s assume their advisor firm runs a Centralised Investment Proposition and had previously risk assessed that client to place them in a model portfolio with significant investment in Far East funds.
Their diligent investment experts have been closely following the simmering trade war between US and China and now have serious concerns that Far East stocks are about to suffer a collapse. As a modern tech-savvy firm, they even provide a digital app to clients which includes their house view on market outlook and investment portfolios.
The client might presume, therefore, that they would be out of their Chinese investments soon after reading that $200bn tariff headline themselves. In an on-demand world where most consumer goods can be ordered in seconds and delivered the next day, it appears reasonable to most people that their investments would be moved in a matter of minutes given that they exist entirely in the ether.
The reality is somewhat different. Even if the advisor is part of the firm’s investment committee and manages to convene an ad-hoc meeting outside the regular schedule (typically monthly or quarterly), it is highly likely that the various controls, approvals and risk monitoring that accompany the operation of the in-house portfolios will mean it is a couple of days before any trades to adjust the portfolio are actually placed. And that’s without any delay introduced by getting the client’s consent or complying with the small print of MiFID2 ex-ante disclosure.
Depending on the funds the portfolio is invested in, there is then a fair chance the trades would miss the dealing cut-off for that day – often set at a few hours before the typical midday dealing point. All of which means the client’s units in any Far East funds would be sold several days after that original headline and at a price that is likely to have fallen significantly as a result of the trade war. Those operational delays are likely to be magnified further if the portfolio is invested in multi-manager funds, which will have to negotiate multiple valuation points and trading cycles.
That’s the sell side of the trade, so what about the other side of the switches to re-shape the portfolio? Depending on whether the proposition offers pre-funding (which many do not), the buy side deals may have to wait for trade confirmation, or even for settled funds to arrive, which means a delay of another 3-4 days. In total, it may take a week or more before the client’s portfolio looks the way they might have expected.
Most people who work in the investment industry would see nothing wrong or especially inefficient with this sequence of events. The client is protected by various safeguards designed to reduce risk and avoid malpractice, their portfolio is managed by well-qualified investment experts and their cash is never in danger.
And yet it has taken a week or more to adapt to an event which most observers would immediately recognise as likely to cause serious market impact. Is that really acceptable in the 21st Century?