No preference for passive just yet

​So far, the third quarter has proven a sudden test of active managers' insistence that they are better equipped than passive rivals to guard investors against a downturn.

The idea makes sense in theory - there's nowhere to hide for index trackers when benchmark returns head south - but in practice manager favourites often suffer more than the average share.

From wealth managers' perspective, the question is more nuanced. The right blend of active and passive funds should make for a portfolio that's neither a beta play nor tilted too far in one direction.

But there's no doubt that trackers and ETFs have become an increasingly important ingredient in this recipe during the bull market years. In some areas, such as the US, this tactic has been long-established. Opinion is more divided on where else it's sensible.

So we looked at equity fund holdings in our database and carved out tracker and ETF representation on a regional basis. The results are below.

The use of such products is consistent across most the major equity regions, with only the US standing out. tBut he least-popular sector for passives, global equity, is slightly puzzling: wealth firms often plump for specific global sectors, rather than exposure to a jumbled index, but that impulse is likely to lead to smart beta products as often as it is to active funds.

By contrast, passive exposure in emerging markets is relatively high: DFMs' problem in this area has become a recurring theme of our recent research, and this chart suggests some don't want to take the risk of active fund selection.

Still, the analysis shows that active funds are still the order of the day in most areas. Even in the US, passives only account for a third of holdings.

What the chart doesn't show is the proportion of each portfolio allocated to a given fund. Similar to the core/satellite trend in alternatives we discussed yesterday, passives are arguably more likely to be the building blocks of a given asset class, meaning their overall weight in a portfolio will be higher than it appears here. Again, that's a trend we'll return to in future.

Special situations come good

A so-so morning for UK equities won't cause too many sour faces today after the gyrations of the past few weeks. And the sight of two turnaround stories bearing fruit will be even more welcome.

BT has had a tough time of it in recent history, its shares hovering around six-year lows all summer, but it's up 9 per cent this morning after announcing profits should hit the higher end of its forecast range for 2018.

The company retains decent support from fund managers: Julie Dean's Sanditon UK had a weighting of nearly 5 per cent as of the end of September, with plenty of income names also involved. They include Gam UK Equity Income (3.9 per cent position) as well as Aviva UK Equity Income, Fidelity Enhanced Income and Mark Barnett's Invesco High Income.

Artemis UK Special Situations, still a popular name among DFMs, also had a 2.9 per cent allocation at the end of September.

Smith & Nephew is another company which looks in slightly better shape today. A profit warning, new chief exec and cost-cutting plan earlier this year, coupled with continued pressure from omnipresent activist Elliott Advisors to spin-off business units, had put the medical devices firm under pressure. But news of rising revenues this morning has boosted shares by 7 per cent.

That will reassure the many popular DFM fund picks who continue to back the company, such as Evenlode Income - which had a 3.7 per cent weighting at the start of the quarter - as well as Merian UK Alpha, Lazard UK Omega and Franklin UK Managers' Focus.

Neither BT nor Smith & Nephew are exactly "deep value" special situations, but neither has had any kind of momentum this year, either. Their recoveries this morning might just give managers (and fund selectors) pause for thought when considering how to position after the mess of last month.

Time to turn bullish?

On which note, today being the first of November means the horrors of October are officially behind us. Not long now until the Santa rally arrives to put a seasonal gloss on a tough year.

That may look like the triumph of hope over expectation, but it's not entirely without basis in fact. In any case, the theory is enough for Investors Chronicle columnist Chris Dillow, who yesterday revealed a decisive asset allocation call: shifting his pension from cash into equities after a four-month pause over the summer.

His reasoning follows the same line of logic as this research paper, which highlights how global share price returns are typically 4 per cent higher between November and April than they are from May to October.

Even a simple eyeballing of charts shows that in recent times, there's been a healthy rally in the final weeks of the year. The rest of the argument will require more careful scrutiny. But while wealth managers will no doubt be unnerved by Dillow's attempt to time the market with his pension - he says he'll be "working longer than planned" if it doesn't pan out - they'll be hoping he's right, all the same.