MMs and DFMs clash on use of ‘usual suspect’ superfunds

Multi-managers and discretionary fund managers (DFMs) have clashed over the use of ‘usual suspect’ funds digging out the best investments for their clients, as the two sectors battle to win outsourced investment business from advisers.

Multi-managers told Investment Adviser that too many DFM portfolios tend to fall back on established products run by the likes of Invesco Perpetual’s Neil Woodford –claims that DFM firms reject.

“It is a little naïve to just pick the big funds because in some of the cases there are better performers out there,” said Thames River Capital’s joint multi-manager head Gary Potter.

He said he had investigated model portfolios from various DFM firms and found that they were disproportionately focused on major established products like Neil Woodford’s £8.7bn Invesco Perpetual Income and £11.2bn High Income funds.

DFMs also relied on Aberdeen’s £3.1bn Emerging Markets fund and $11.7bn (£7.5bn) Global Emerging Markets Equity fund and First State’s £5.6bn Asia Pacific Leaders fund, he said.

“But while [those funds] are in pole position now, being at the top of the group doesn’t always guarantee victory and that’s my concern,” he said.

David Coombs, multi-manager at Rathbone Unit Trust Management, said DFMs’ reliance on a concentrated group of funds would exacerbate an existing problem of more and more cash going to fewer and fewer funds – making it tougher for the funds to perform well.

Not all star multi-managers deem it necessary to shy away from large funds, however. Eight out of 13 holdings in the top-quartile £3.4bn Merlin Income fund are more than £1bn in size. The fund has produced a top-quartile return of 22.45 per cent over five years to July 12 compared with the IMA Mixed Investment 20-60 per cent Shares sector average of 6.4 per cent, according to FE Analytics.

DFMs also seem to vary considerably in their use of large funds.

On the Ascentric platform, for instance, there are 35 DFM firms running model portfolios. Each firm on the platform has holdings in the £11.3bn Standard Life Investments Global Absolute Return Strategies (Gars), Aberdeen Emerging Markets, First State Asia Pacific Leaders and £4.8bn M&G Strategic Corporate Bond in some or all of their portfolios.

However, on the Nucleus platform – which lists model portfolios from 13 DFMs – the results were less supportive of the multi-managers’ claims. Just five of the DFMs had portfolios featuring the most used fund – Evy Hambro’s £2.4bn BlackRock Gold and General fund.

Furthermore, data from wrap Novia showed four of the five most common funds used by DFMs were tracker funds, although the most popular was the £1.6bn L&G Dynamic Bond fund, managed by Richard Hodges.

Jonathan Webster-Smith, director at DFM firm Brooks Macdonald Asset Management, said: “I would have said it is the multi-managers who buy the big funds.

“But, equally, we don’t run away from large funds just to be different. Do we own Newton Asian Income and M&G Optimal Income? Yes we do – because they have performed well.”