InvestmentsMay 23 2016

Polarised returns can pose a challenge

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Polarised returns can pose a challenge

Tracking the performance of discretionary fund managers (DFMs) has long been a challenge for advisers due to the lack of available data.

Two sets of indices – one of which is the four private client indices (PCI) run by Asset Risk Consultants (Arc), which gathers data from around 50 investment houses – can provide some insight for advisers when turning to DFMs on behalf of their clients.

Each of these indices is named after its risk profile relative to equity markets, with the Arc Sterling Cautious PCI generating an annual rise in 2015 of 1.3 per cent, below the increase in the Balanced Asset, Equity Risk and Steady Growth indices, as expected.

The Arc Sterling Steady Growth PCI recorded the best discrete annual performance of the four indices last year, rising by 2.3 per cent.

The range of increases in the FTSE WMA indices is similarly narrow. But one-year cumulative performance figures to May 12 2016 indicate investors would have been better off in the FTSE WMA Stock Market Conservative index, which was up 1.8 per cent, while the so-called ‘Growth’ index was down 1.6 per cent, data from FE Analytics shows.

Guy Stephens, managing director at Rowan Dartington Signature, says: “Performance is polarised at the moment with such disparity in markets over the past two years, with the fall in the oil price and weakness in commodities catching some out. Where we go from here is quite a challenge, but the fundamentals don’t support a rebound.

“Using a good DFM will definitely have helped the adviser in recent times. We were able to underweight the energy sector, but then to close this in mid-February when the markets were briefly becoming hysterical. This is when being nimble adds value without having to refer to clients for approval.”

In today’s turbulent market conditions, other factors such as risk profiling and asset allocation should form a far greater part of any due diligence process Richard Philbin, Wellian Investment Solutions

Mr Aldous believes equity markets in the UK have suffered from uncertainty surrounding the EU referendum set to take place on June 23, which has also weakened sterling.

But he adds: “These two factors alone have offered opportunities to investors that, arguably, a DFM should be well-placed to take advantage of on behalf of its clients.”

In its May 2016 performance report, Arc observes: “After a tough year in 2015, when private clients saw their investment portfolios deliver returns in line with or below inflation, 2016 began with a few market commentators predicting a financial market tempest.

“The answer for most private client investors is to invest with discretionary managers who adopt a multi-asset class approach to investing, with the intention of smoothing the gyrations of particular markets and seeking out the pockets of value that exist in asset classes, sectors and geographies.”

But Wellian Investment Solutions’ Richard Philbin warns advisers against relying solely on short-term performance numbers when it comes to choosing a DFM.

Mr Philbin, who is chief investment officer at Wellian, says: “Historically, investment returns and short-term performance were considered to be far more significant factors in determining the overall success of a DFM portfolio. But in today’s turbulent market conditions, other factors such as risk profiling and asset allocation should form a far greater part of any due diligence process.”

Advisers may do well to heed his words, as this year looks to be no less turbulent than 2015 – the looming EU referendum continues to weigh on markets, while the prospect of Greek woes resurfacing and further economic data showing a continued slowdown in China threaten to unnerve global markets at any time.

The relationship between adviser and DFM should be able to outlive any short-term market turbulence.

Ronnie Binnie, head of business development at Standard Life Wealth notes: “What goes up must come down [and] investments will continue to have periods where performance is challenged.

“But the odds of great client outcomes are significantly improved where you have financial planners and DFMs working in partnership, focusing on their area of specialism with the client at the centre of their thoughts.”

Ellie Duncan is deputy features editor at Investment Adviser