A wide-ranging review of discretionary manager performance has found the majority of portfolios have failed to add value in the past three years.
Asset Risk Consultants (Arc), which has collected data on more than 60,000 wealth manager portfolios, found the amount of outperformance above market returns – known as alpha – has plunged in recent years.
The research looked at the performance of multi-asset portfolios classified in Arc’s two most popular sectors, Balanced Asset and Steady Growth.
It found that in the past three years approximately 50 per cent of portfolios in those sectors had underperformed the market on a risk-adjusted return basis, which Arc characterised as generating “negative alpha”.
By contrast, fewer than 20 per cent of the portfolios generated risk-adjusted outperformance, or “positive alpha” in the same period, with the rest classified as “neutral”.
The analysis compared the performance of each portfolio to a hypothetical portfolio made up of cash and a global equity index, which had the same risk profile as the chosen discretionary manager portfolio.
Any portfolio that beat this benchmark after fees was characterised as delivering positive alpha.
A portfolio was deemed “neutral” if its underperformance fell within a small enough margin.
The report makes difficult reading for the discretionary management industry, as its results span the period in which the RDR came into force, which was expected to encourage large numbers of advisers to outsource their clients’ investments to discretionary managers.
Instead of improving the investment performance of clients, the research suggests many discretionary managers have increasingly failed to add value.
Graham Harrison, managing director at Arc, said the results “provide an insight into the ongoing difficulties being experienced by investment managers in delivering added value to their clients over and above a passive investment approach”.
Mr Harrison said the recent modest performance of discretionary portfolios was linked to “government and central bank manipulation of interest rates and bond markets” since 2009.
He said such action “rendered fundamental investment analysis impotent”, hampering discretionary managers.
The report pointed to the period leading up to the financial crisis, in which, for a brief moment, around three-quarters of discretionary portfolios were generating positive alpha.
However, the report declared 2015 to be “a year of ascendancy for actively managed portfolios by professional investment managers”, turning around the underperformance of recent years.
But Mr Harrison admitted he could be “early” with that prediction, given the actions of the European Central Bank and the US Federal Reserve are likely to continue to exert strong influence on markets this year.