Concentrating on familiar faces

Are DFMs backing the same horses? As we touched on the other week, it's a question that often comes to mind - given the biggest funds are growing at a faster rate than their peers, and so too are the largest wealth managers.

Our previous data analysis, drawn from our database of discretionaries' model portfolio holdings, showed there were clearly significant pockets of concentration in areas such as UK and US equity and, to an extent, alternatives.

The latest chart, below, extends that analysis to a batch of new sectors. The findings are broadly consistent with the earlier data - the ten most popular funds account for around 50 per cent of all DFM holdings in a given asset class. But two areas warrant further investigation.

This time, let's focus on UK equity income and Japan. 

The former's most popular funds tend to be used pretty widely, which may not be the most earth-shattering revelation. Yet we should note it's not the obvious names of old around which DFMs are now bunching. Instead the likes of Man GLG and Schroder Income Maximiser sit at the top alongside the Artemises and JOHCMs of this world.

It's Japan that stands out most, however. We haven't discussed fund selection issues in this part of the world too much on the whole, but the table shows there's a certain amount of groupthink going on here.

The ten most popular funds account for two thirds of all fund selections in the region, the highest such proportion in either of our two charts. And it's not for want of more options - the IA Japan sector alone is home to 80 portfolios. It's simply the case that DFMs are piling into Baillie Gifford, Man GLG and, yes, Legg Mason, alongside a few others.

So an obvious way to stand out from the crowd would be to shift away from these portfolios in favour of something a little different - should those other funds be up to scratch, of course.

Leaders and laggards, part two

Let's combine our look at concentration with a return to another recent subject: the relative performance of wealth managers' most popular picks. The main equity sectors were more or less covered off in our previous analysis, so it's bonds and property for today.

The chart below looks at the 10 most popular funds (nine for property, given the size of the sector) in our MPS tracker, ranked by quartile over a three-year period. The proportion outperforming their respective sector lie below the black line; underperformers sit above it.

IA sectors are a very basic comparison tool, but there's no doubt that the recent splitting of the property universe has made it easier to compare open-ended funds.

The chart's suggestion is that discretionaries' picks are still suffering the consequence of the temporary fund suspensions seen two and a half years ago following the referendum result.

Two popular names, from Kames and L&G, sit in the top quartile. But other DFM selections have been less than average: all those above the black line are funds that gated investors in the summer of 2016. They have, at least, managed to retain fund buyers' confidence despite that inconvenience.

Wealth managers have done better with corporate and strategic bond picks; they're not outright wins but fund selections generally hold up pretty well. Six corporate debt funds beat their average peer, and five strategic bond funds do likewise.

One note of caution would be that when it comes to fixed income, in particular, DFMs are holding these positions in anticipation of difficult times to come rather than past performance. Funds whose performance has started to come good this year, having lagged rivals in better times for the asset class, might prove worthier bets in the coming months.

Paying out and cashing in

​Buried in the latest BAML fund manager survey is a piece of data that sums up how managers are pulling themselves in two different directions.

There are few surprises in the survey's October headlines. Investors cautiously bought the dip last month (adding to the US, in keeping with the behaviour our own database recorded in the run-up to the sell-off); tech remains the most crowded trade; trade wars the biggest tail risk, and so on.

Something more unusual awaits further down the list of findings. The net proportion of investors who think corporate payout ratios are too high has now reached 33 per cent, the highest level ever recorded. That beats the previous record set in 2016, and comes as concern over corporate debt levels, in the US in particular, have become more prominent.

Worries about dividends have flickered sporadically over the past few years, and even equity income managers have occasionally told companies to scale back distributions (in order to invest in their own businesses). But not much has ever come of it, and another statistic in the survey hints at why.

The proportion of investors who believe high-dividend strategies will outperform peers over the next 12 months rose sharply in October, even as those issues with payouts increased. 

The occasional dividend trap aside, it's a fair bet that the twin pressures of a need for yield and a search for safer investments will mean managers continue to back the biggest payers come what may. Actions speak louder than words for asset allocators.