DFM research reveals widespread underperformance

When compared to the performance of a basic asset-allocation model, most discretionary investment managers have underperformed in the past three years, according to a report from the Asset Risk Consultants (Arc).

The report has revealed that an investor who had passively followed the FTSE Apcims indices – a range of wealth management indices – would have ended up in the top 10 per cent of discretionary managers in terms of performance in the past three years.

The report said the reasons for much of this underperformance were “an overcautious stance with respect to equity markets and a lack of exposure to UK government bonds”.

Arc said: “In the aftermath of the financial market crisis in 2008, with the benefit of hindsight, private client discretionary managers placed too much emphasis on capital preservation strategies, thereby capturing only part of the ‘relief’ rally.”

Aj Somal, chartered and certified financial planner at Aurora Financial Planning, said the figures were “very worrying” for advisers looking to outsource.

He said: “The report surprised me. The majority of managers tend to underperform in the long term but you would think discretionary managers should perform better.

“As an adviser who outsources, it is disconcerting that so many of them are underperforming.”

Mr Somal said the figures showed there needed to be more transparency over discretionary management performance, especially now there were more discretionary managers targeting advisers.

However, Kevin Morgan, managing director at Consilium Financial Planning, said he was not surprised by the figures due to the charges incurred by active management, but he said it was still possible to find discretionary managers who consistently outperformed.

Mr Morgan added that, while performance was important, it was not the “be-all and end-all”. He said clients enjoyed the face-to-face contact and personal service that a discretionary manager could provide, but was aware that could come with costs that might drag on performance.

The FTSE Apcims indices are designed as a strategic benchmark for wealth management portfolios. They are decided by a committee that sets and picks indices for the asset allocation, so the Balanced index has 42.5 per cent in UK equities, represented by the FTSE All-Share index, for instance.