FCA's property fund paper creates one big winner

The FCA's consultation on property funds has brought with it a wave of speculation over the possible impacts. But will it change that much for wealth managers?

Clamping down on property funds holding cash probably isn't the outcome many were expecting. The regulator is keen for funds to gate straight away to prevent the kind of first mover advantage that many DFMs enjoyed after the Brexit referendum in 2016.

That could mean a change in approach for some wealth managers. In truth, this shift has already begun when it comes to model portfolios.

Of the holdings recorded by our database, 38 per cent of physical property positions are open-ended. We'd wager that's a fair bit lower than you'd have seen in 2015. Many have shifted to investment trusts holding either commercial property or infrastructure.

Being able to buy and sell at will is a crucial aspect of models, of course. But so too is the diversification that physical property funds can bring to a portfolio. It's notable, then, that the single most popular conventional property fund among DFMs is F&C Property Growth and Income, which has around a quarter of its assets in physical property, with the rest in related shares.

Crucially, this fund won't be captured by the FCA's proposed new rules. That's because of a caveat that many seem to have missed from the paper – the requirement to suspend a portfolio immediately if an independent valuer has concern over 20% of a portfolio only applies if the fund has more than 50% of its assets in illiquid holdings in the first place.

So no problem for multi-asset funds, and no problem for F&C either. It's not a perfect solution – many will want more than a fifth of their property exposure to be directly held – but its liquidity and immunity to this tougher oversight should mean its popularity only increases from hereon in.

Are DFM's fund picks beating the market?

Studies showing the failings of active management are nothing new, though one lengthy analysis published last month was more comprehensive than most.

Of course, every one of these studies examines the entire fund universe, warts and all - despite the fact a sizeable proportion would never get onto professional fund selectors' radar in the first place.

So we decided to use our model portfolio database to investigate how DFMs' specific fund picks have done versus the wider universe.

We looked at two timeframes: 2017 as a whole and the first nine months of 2018. The results suggest wealth managers are earning their corn: the proportion of DFM picks beating benchmarks outstripped the wider fund universe's performance across every major region last year, as this chart shows:

Turn to 2018 and there's no denying that active managers have had a harder time of it so far, as S&P's latest 'Spiva' results recently indicated (we've truncated the x axis in the below chart, but it should be clear that fewer funds have outperformed this year).

But here's the silver lining: the performance gap between wealth managers' selections and the broader fund universe has widened in almost every case. That suggests that DFMs may be adding more value this year than last despite active managers' struggles.

There is one notable exception. Active emerging market funds have performed disastrously in general, with only one in five beating the benchmark in the first nine months of the year. This falls to just 7 per cent for DFM picks. 

This is partly down to selectors clustering around a handful of funds: in a smaller pool, it only takes one or two popular picks going wrong to throw off the numbers. Nonetheless, it's something else to ponder as emerging market shares continue to wrestle with trade wars and higher funding costs.

Introducing the MPS tracker

You'll have noticed references to a fund selection 'database' in the two stories above. That's our MPS Tracker, which monitors asset allocation and fund selection moves across over 300 model portfolios run by more than 50 DFMs. We'll use this data to bring you exclusive insights every weekday morning.

As time goes on, these databases will evolve to reflect the changes made by fund selectors and investment managers. There could be difficult decisions ahead: much has been made this summer of US equities decoupling from global stockmarket performance. Already our database indicates some wealth managers are joining their peers in reassessing their equity exposures – more on that to come in the following weeks.

Take bonds, too. The asset class has given fund buyers more cause to fret than most over the past half-decade, and signs of some long-feared instability were evident earlier this month when benchmark Treasury yields moved another leg higher. Yet here more than anywhere, DFMs have been content with their lot, in many cases riding the high-yield rally for as long as it lasts.

The third quarter could change all that. Whether recent weeks prove to be a false dawn or not, we'll be shedding light on what it all means for portfolios by combining our own data with the best of the investment coverage from across the FT here every morning.