Where do DFMs stand out from the crowd?

​A new report from Willis Towers Watson has a different take on a familar theme: the biggest funds are getting bigger, faster. Its research relates to pension schemes, but the same trend applies to everything from asset managers' products to DFM portfolios.

For wealth managers, the most pertinent question is whether this concentration means their fund selections are increasingly coming to mirror rivals'. Can a given model portfolio range really stand out from its peers when it comes to underlying holdings?

We've delved a little deeper using our MPS tracker. The chart below investigates just how widely held the ten most popular funds in a given sector are. It also indicates whether a sector has a 'long tail' of different selections, or whether the top ten account for the bulk of all fund picks in the asset class.

One thing to note is that the concentration of support among popular US equity funds (nearly 65 per cent) may well be down the difficulty of stockpicking in this market: six of the most popular 10 names are passives. 

But the stand-out results are in the alternatives category - which we define here by excluding commodity and property funds to concentrate on absolute return, hedge fund and long/short products. It's simultaneously both the most and least diverse area.

The proportion of DFM holdings accounted for by the 10 most popular picks in the sector (the light blue bar) is just 40 per cent - comfortably the lowest ranking on the chart.

That might not be surprising: the pool of funds on offer is much broader in alternatives than for a given equity region, and in a space aiming for differentiation you'd expect less crowding.

But despite all this choice, the dark blue bar shows that wealth managers are relying heavily on the ten most popular funds. Names like Merian Global Equity Absolute Return, Janus Henderson UK Absolute Return and Invesco Perpetual Global Targeted Return crop up again and again across MPS ranges. 

In short, for many wealth managers the alternatives space increasingly operates along core/satellite lines. The core fund selections are typically the same wherever you look - but the smaller positions differ more drastically than in other sectors. Whether this is enough to make a given DFM stand out from the crowd is another story.

October's biggest question

Wealth managers who hoarded cash before October will feel vindicated by this month's sell-off. But for many it's a minor victory that leads to a harder question. Stop us if you've heard this one before: is it time to buy the dip?

This long bull market has not been without its drawdowns, but bargain hunters have generally been rewarded. Global, and in particular US markets have generally rebounded quickly in the aftermath of mini-slumps. Buying back in has become the standard state of affairs for both fund managers and fund selectors.

There's an argument that 2018 is a scarier affair: the sight of markets repeatedly turning red is giving dip-buyers pause for thought.

Analysts at Barclays said this week they come down on the side of caution, arguing it would be better to "miss the first leg of any rally" rather than jump back in. Very different language to that we've been used to over the past few years.

Many DFMs feel the same. Guy Stephens of Rowan Dartington says he'll "keep some ammunition back for if and when real fear takes hold":

The challenge right now is that we have four areas of uncertainty, none of which are going to pass by in the short term. They are Trump's tariff war with China, Italy's budget battle with the EU, the UK's Brexit battle with the EU, and a giant question market over global growth in light of the first of these.

The nature of MPS ranges means most wealth managers won't have retreated to cash in a material way. But the volatility has certainly caused some to reassess their priorities. Over the next couple of weeks we'll be using our MPS tracker to investigate how DFM asset allocations have shifted before and after the current sell-off.

Yield curveballs

The sell-off has left investors split over the future path of equities, and there's also less consensus on fixed income than the "rates will rise" narrative might lead you to believe.

The divide is most obvious when it comes to the US yield curve: strategists are again unable to agree whether it will steepen or flatten in future.

A dwindling gap between long and short-dated yields caused serious consternation early this year, largely because an inverted curve (where longer-dated yields are lower than shorter-dated) has proved a reliable predictor of recessions in the past.

But as Columbia Threadneedle multi-asset man Toby Nangle points out, even a flattening curve gives less certainty about the future than many assume.

He says flattening doesn't necessarily lead to inversion: the curve previously became as flat as it is now a full seven years before inverting at the end of the 1990s. It may be Halloween, but it's always worth remembering that some things just aren't as scary as they look.​