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How Black Monday could expose flaws in DFM selection

How Black Monday could expose flaws in DFM selection

Several discretionary fund managers have raised concerns about a lack of differentiation in the market meaning advisers will often struggle for adequate diversification across an outsourced panel.

Speaking to FTAdviser, Louis Coke, investment manager at Charles Stanley, said with most advisers using around three DFMs, there was the risk that in periods of volatility like the present, different strategies may correlate and experience similar problems.

“The market is looking increasingly homogenised these days. It is the DFM’s job to be different, to be a bit more bold in their asset allocation or conviction calls.”

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Richard Stammers, investment strategist from European Wealth, agreed that there is a great deal of likeness between most DFMs, which means adviser due diligence on picking their panel is all the more important.

“That can be quite time consuming though, so it’s tempting to use resources better by identifying which one is offering your clients the best range of investments and focus on that relationship.

He explained that the perception of risk is different from different angles, so many managers will feel that if the whole DFM market has a bad time then they will not stand out from the crowd.

“Conviction certainly presents challenges, but we’re not getting paid to just hug a benchmark. If you’re doing things differently, then the most important thing is to communicate that properly, especially in supporting the adviser to be able to explain to their clients what the strategy is and why it might be underperforming.”

Glenn Meyer, head of managed funds at RC Brown Investment Management, concurred that after last week’s global market rout, his team stuck with their guns, but were quick to send a message to advisers and clients telling them why.

David Gurr, founding director of due diligence firm Diminimis, urged advisers to understand the different styles of DFM, while also looking at market exposure “caps and collars” that will lead to correlation in times of crisis.

“Inevitably many will have the same tools, with only a small pool of economists and a limited number of viable assets creating a high degree of commonality.”

Barry Neilson, business development director at Nucleus, believes there is a certain level of homogenisation with DFM offerings via platforms, driven by the need to map, to some degree, portfolios to the asset allocation outputs of the tools most commonly used by advisers so they are aligned to the overall central investment process.

“DFMs will also strive to run models with the same constituent parts across all the platforms they deal with as this is less administration intensive and therefore may be restricted if one, or more, platforms has a limited asset universe,” he added.

Andrew Wilson, Towry’s head of investment, pointed out: “While IFAs will often use two or three different DFMs, each client will usually still simply benefit from the investment services of one of these DFMs, most appropriate to them – so there shouldn’t be any issue as long as they are investing responsibly and to the client’s benefit.