A large proportion of discretionary managers have failed to match the risk-adjusted return from cash and equities in the past three years, according to a new study from Asset Risk Consultants (Arc).
In its report, entitled ‘Is beating the market getting more difficult’, Arc found that only 27 per cent of bespoke portfolios delivered risk-adjusted returns that were better than that delivered by a portfolio consisting of just cash and a fund tracking the MSCI World index.
Furthermore, more than a quarter of the portfolios showed signs of “systematic underperformance”.
The research consultancy calculated the results by giving the risk-adjusted performance of the cash-plus-world equities strategy a score of zero and then calculating the risk-adjusted performance of portfolios against that, so that a score of more than zero represented outperformance and less than zero underperformance.
The majority of portfolios underperformed in the past three years, with 23 per cent scoring less than -1, which Arc said represented significant underperformance.
By contrast, only 3.5 per cent of the portfolios examined showed a score of more than 1, which was indicative of significant outperformance.
Arc said the likely reasons for the underperformance were both “a bias towards domestic equity exposure and/or emerging markets” and the fact that “none of the traditional income-producing and/or risk-diversifying assets have delivered attractive risk-adjusted returns”.
The report said: “The last three years have been a period when multi-asset-class investing has not delivered the expected uplift in risk-adjusted returns.”
Financial advisers expressed concern at the study but questioned the appropriateness of a cash/world equity benchmark against which to measure all the various bespoke portfolios examined by Arc.
Aj Somal, chartered financial planner at Aurora Financial Planning, also queried how “relevant” the benchmark was, but said advisers should monitor such statistics and should be “proactive” in changing to a different discretionary manager if performance disappoints.
Fraser Donaldson, insight analyst at Defaqto, said that while his firm did not examine bespoke portfolios, its analysis of discretionary model portfolios found that DFMs had delivered reasonable returns in the long term but had struggled in recent years.
He attributed the struggles to “curious” market conditions that have left DFMs struggling to find non-correlated assets.
The Arc report found that during a longer period – the 90 months from December 2005 to the end of September 2013 – discretionary managers had much better relative performance to the cash/world equities benchmark.
