Discretionary performance criticised

The discretionary management industry has been slammed for delivering dire levels of performance to investors, with only a tiny minority found to have outperformed significantly.

Just 3.5 per cent of discretionary managers performed strongly in the past three years and only 27 per cent fared better than a basic investment portfolio, according to independent research group Asset Risk Consultants (ARC).

The stunning result calls into question financial advisers’ increasing use of discretionary fund managers as an outsourcing tool to manage their clients’ investment portfolios under the RDR.

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The research, based on the risk-adjusted performance of thousands of bespoke portfolios run by 52 discretionary firms covered by ARC, compared returns with a basic combination of the MSCI World index of global equities and a cash weighting.

Peter Matthew, managing director of Jacksons Wealth Management, which outsources some clients to discretionary managers Seven Investment Management (7IM), described the report as a “pretty damning indictment”.

But he added that the global equity and cash benchmark used by ARC could be “arbitrary”, suggesting the research might be presenting an unfair comparison.

Defaqto analyst Fraser Donaldson said that discretionary managers had performed better in the longer-term.

He said the past three years had proved tough because of the “curious” market conditions.

Brian Mairs, business consultant at the Wealth Management Association, formerly Apcims, said: “Passive investments are great in a rising market – that’s what they are for. Many portfolio managers will use them as a cost-effective way of following markets.

“But when the market falls, discretionary managers can move quickly and decisively to protect value and redeploy funds so they can still meet the client’s investment goals.

“Over the past three years the principal stock markets have risen, so passives have performed well. If the timeframe moved back just a few years, the picture would be very different.”

Read more on the ARC report here.