Tracking the performance

This article is part of
Discretionary Fund Management - October 2014

Discretionary or wealth management is often seen as a bespoke service, but the development of new technology on platforms, and the proliferation of risk-rating and risk-targeting strategies, has brought the sector into the mainstream.

No longer the preserve of the wealthy, ordinary investors can now access these discretionary fund manager (DFM) services or model portfolios, and with increased popularity comes the need to compare performance and ensure the investments are meeting client expectations.

In this area, however, supply has not yet kept pace with demand. There is no DFM or model portfolio equivalent to the IMA sectors to produce averages of different types of strategies and to compare like with like.

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Therefore, short of tracking down every single-managed portfolio individually, this leaves investors with the slightly less satisfying option of looking at indices compiled by various organisations.

The Asset Risk Consultants (Arc) Private Client Indices (PCI) produce performance reports and tables based on the portfolio performance information provided by roughly 53 private client discretionary managers, with the portfolios covered placed into one of four volatility categories – cautious, balanced asset, steady growth and equity risk.

Figures for the third quarter of 2014 show all four indices produced a positive performance of between 0.9 per cent from the Arc Sterling Steady Growth PCI to a high of 1.2 per cent from the Arc Sterling Cautious PCI.

Interestingly, it is the Cautious index that outperformed in the third quarter, while the steady growth produced the lower return, something that many investors might expect to be reversed. Given the indices are formed from a sample of managers with a broad separation, these results are not conclusive.

The other option for performance comparison is to look at the Private Investor Indices, developed by the FTSE and the Wealth Management Association (WMA), which indicate the returns investors might expect from their portfolios.

They are split into five indices to reflect differing aims of investors: the Conservative, the Income, the Growth, the Balanced and the Global Growth. But as the WMA notes, “these are not industry-wide benchmarks”, although it suggests they can provide a “useful perspective” if used properly.

Although in line with the Arc PCI figures, of the five indices for the year to October 14, it is the Conservative index that has led the way with a return of 5.36 per cent, while the Growth index has delivered a total return of 1.06 per cent, according to FE Analytics.

Again, the fact that these indices do not cover the whole industry and are merely a sample or snapshot of what investors might expect, can be confusing for those that might equate conservative and cautious with low but steady returns, while growth portfolios could be expected to aim higher.

While outsourcing to discretionary and wealth managers is becoming more popular in the post-RDR world, there is still some way to go for the industry to make itself transparent, particularly in performance and asset allocation terms.

Nyree Stewart is features editor at Investment Adviser