Dalgliesh: DFMs must focus on volatility not returns

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Dalgliesh: DFMs must focus on volatility not returns

The head of Parmenion Capital Partners’ discretionary fund management (DFM) business has urged his industry to focus on volatility rather than just returns.

Parmenion Investment Management (Pim) managing director Peter Dalgliesh suggested that in the long run, such a move would serve the DFM community well.

“We are in an environment of low returns and should not be selling ourselves on outperformance. We are not in the days when the risk-free rate was 10 per cent,” he said.

“We have to focus on volatility and stop making decisions based purely on performance. If you have got the research right and are focusing on volatility, the returns will come.”

A failure to take volatility into account would not serve DFMs well in the longer term, he said. “We [Pim] have gone away from talking performance and focus on the risk instead.”

The Pim range covers various investment styles and approaches, including tactical and strategic asset allocation, active and passive, and ethical focuses.

However, Mike Horseman, managing director of adviser firm Cockburn Lucas Independent Financial Consulting, said it was important not to restrict investor focus to one area.

“Volatility is part of life, so it’s about stress-testing the portfolio and understanding what outcome the client wants and when.”

He added: “The answer here is to look at both areas as part of your research, as well as others such as cost and benefits.” He also claimed investors had to accept volatility, though this factor may be less important over the long term.

“The point made [about the need to focus on volatility] may be far more important to a client with a short time horizon as opposed to a client with a long-term horizon,” he said.

Pim’s Mr Dalgliesh warned that DFMs still lacked a shared measure of performance, at a time when EU regulation tackling this issue faced a delay.

He said: “The issue of Mifid II and the possible delay is interesting, because the whole [directive] is about greater transparency. The issue for DFMs is about comparing performance. There’s never a common factor you can use to measure performance.

“We will try and stay ahead of the curve on the transparency issue, as this is a big issue for end clients.”

Mifid II was set to come into effect in January 2017, but regulators in the European Securities and Markets Authority and policymakers in the European Commission have been pushing for a one-year delay. With the finer points of the regulations still to be finalised, financial services firms had been concerned about having too short a timeframe for implementation.

The Commission is now expected to announce a year-long delay to the entire directive, after parliamentarians accepted a phased implementation would be too problematic.

‘Good due diligence is good due diligence. This has never changed’

Increased transparency in the DFM market is making it easier for advisers to carry out due diligence on whose services they use, an analyst has claimed.

Fraser Donaldson, an insight analyst for wealth management at research firm Defaqto, said advisers should take advantage of an increase in the amount of information provided by DFM providers.

He said: “The discretionary market continues to evolve and information that may not have been available a couple of years ago may well now be more freely available. For instance, we are seeing firms being much more transparent in terms of charging and performance than they were just two or three years ago.”

As part of this, he emphasised advisers should focus on analysing the firm they are considering working with, its proposition and the contractual arrangements involved.

Mr Donaldson stressed the importance of due diligence for advisers outsourcing their investment choices, regardless of the regulatory backdrop. “We have had the UK regulators issuing guidance on due diligence and endless speculation and scepticism in the financial press about what [the EU’s] Mifid II will bring to the table,” he said.

“For me, good due diligence is good due diligence. This has never changed.”

The Wealth Management Association, in partnership with consultancy Diminimis, is working to create a standardised due diligence questionnaire on discretionary fund management.

This would be distributed among investment advisers looking to source a DFM, with the aim of streamlining their requests.