Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs. We know you're bombarded with information, so each day we'll be sifting through the mass to bring you what you need to know, backed up by exclusive data and research.
Boutique is beautiful
New research published this week has backed the idea that funds run by boutique asset managers consistently outperform peers. Not surprising, you might say, given study author AMG - the majority owner of Artemis, Veritas and others - operates a "multi-boutique" business model.
Cynicism aside, the findings will make intuitive sense to UK fund selectors, who usually have a similar preference for the smaller asset manager.
But as is so often the case, the AMG research is focused on the US market, and institutional fund firms therein. And while the average boutique size may have risen over the years, the study's upper limit of £75bn is still far too large to have any relevance over here.
So we've applied the same philosophy to our own database of wealth manager fund holdings, adapting the data we published a couple of weeks ago to examine whether boutique really is better. Here's how such choices fared against all DFM fund selections last year:
Our definition of boutique only includes those with assets of £15bn or less. Using this metric, the results speak for themselves: funds run by boutiques performed better than most others last year. Nowhere more so than in the US equity market, where every single portfolio beat the S&P 500.
The one exception, on a regional basis, is Europe, where smaller fund houses lagged. The second chart shows that remained the case this year, even as markets became tougher to navigate (note the truncated Y axis).
As for the sample sizes - boutiques play an outsized role in UK equity fund selection: their offerings account for four of every 10 active fund picks among DFMs. They also represent a similar proportion of global equity picks, though this drops to one in five for Europe and Japan.
Yet the US remains something of a no-go area, despite the performance of the smaller firms highlighted above. Boutiques account for just 16 per cent of wealth managers' fund choices in the region. And even fewer selectors can find, or maybe trust, a boutique to handle their emerging market exposure – just one such provider is featured in our database.
Call it a spade
The era of "outcome-based" investing means more and more products now feature specific return targets in a bid to make things easier for investors. But because this is the investment industry, gestures towards clarity can sometimes simply confuse things further.
Its new target (CPI plus 3 per cent) is more in keeping with kind of target stated by a typical DFM model portfolio. Our MPS tracker suggests that DFMs, on the whole, are successfully keeping things simple. Most are consistent in their stated aims, whether this is beating inflation (in general or by a stated amount), preserving capital, or balancing growth and income.
That said, there are times when this equilibrium has gone awry: one wealth manager's balanced portfolio combines a longer-term return target of RPI plus 4 per cent with, it says, a partial focus on capital preservation.
These are isolated cases, and regular housekeeping tends to sort out other issues. Sanlam Wealth decided this summer to move away from names such as "Blue" and "Indigo" in favour of the more prosaic standards like growth, balanced and so on.
But even these standard industry terms face an uncertain future after the FCA's recent platform market study questioned whether they mislead investors. The regulator was specifically referring to models run by platforms themselves, but the comments won't have escaped DFMs' notice. A further rethink may be on the cards for 2019.
Another passive puzzle for allocators
With politics now out of the way for the next few weeks - Brexit aside - markets and fund selectors can get back to fundamentals for the rest of the year. That, at least, is the theory. In reality there is always one more hurdle to overcome before said fundamentals reassert themselves.
The focus may be back on the Federal Reserve hiking rates and the extent of China's slowdown for now, but either way the enduring lesson of the last few years is no bad one. Ignoring politics altogether has tended to work out well for DFM portfolios. This is partly the path of least resistance: per Brexit, it's become harder to discern exactly what will happen at any given time on the political front.
Other mysteries are more enduring, and just as intriguing for wealth managers. When it comes to figuring out the reasons behind the latest sell-off, plenty are willing to point the finger at familiar foes.
Many have looked to jitters in the bond market, sparked by the Fed. But there's also the argument that indexation changes, specifically those which saw some of the biggest US tech stocks reclassified in late September, had a part to play.
The growing significance of passive fund flows has been viewed warily for some time now - and if we are finally reaching a point at which ETF buying and selling has an outsized impact on markets, that may prove harder to ignore than political ruptures.