Double trouble

In the era of easily-accessible model portfolios, DFMs have increasingly come to view multi-asset funds as competitors. Some may be dismissed as a less sophisticated option, but the fees charged by the likes of Vanguard's LifeStrategy range are low enough to make financial advisers and private clients in the know give them more than a second look.

Active multi-asset funds might pose less of a threat nowadays, but they're still trying to do many of the same things as wealth manager model portfolios. Nonetheless, our fund holdings database shows some discretionaries are using them here and there.

The most popular choices are understandable: several DFMs still look to an old stalwart, the Troy Trojan fund, doubtless for capital preservation purposes. The same goes for Ruffer Total Return.

Other selections are more unusual. One discretionary uses Fidelity Multi-Asset Income, another Artemis Monthly Distribution, and a third has opted for Miton Cautious Multi-Asset. Even one fund from Jupiter's Merlin range pops on a solitary occasion.

None of these is exactly the same as the others, of course. DFMs will have a clear idea why they're holding each particular offering - even if it's simply that such funds blend easily with other selections in the portfolio. Still, it brings to mind a warning made by Natixis some three years ago now. 

The asset manager said many advisers were choosing funds that simply emulated the performance of the wider portfolio - providing limited marginal benefits but "another layer of fees". 

At the same time, the firm did perhaps answer its own question by conceding that multi-asset choices are often used as a place to park money until other opportunities emerge, or to control the volatility of the overall portfolio. Both rationales still make sense even now.

Are frontier markets dying out?

As more and more countries gain emerging market status, will frontier investing become obsolete? Frontier markets managers themselves are starting to address the issue, and their stance won't surprise you. Oliver Bell of T Rowe Price sums it up as follows:

Some market participants are now concerned about the impact rebalancing acts [like Argentina’s recent upgrade] will have on the frontier index. However, contrary to some commentary, in our view it is ludicrous to suggest the frontier classification will soon be rendered obsolete.

He believes plenty of future candidates remain: 148 countries, to be precise. 

We speculated last week about whether frontier funds would become a bigger part of DFMs' portfolios if the struggles of their EM peers continue. For now, the evidence of that is scant: just nine of the 109 emerging and frontier market vehicles in our database fall into the latter category.

EM funds are allowed by sector rulemakers like the IA to have 20 per cent of frontier exposure themselves, but most are shying away: DFMs' top emerging market selections don't have more than five per cent in the asset class.

So whose tactics are better? We've compared the performance of those EM picks with the handful of dedicated frontier funds that they use:

The average frontier fund pick has had a trickier time in the shorter term, though over five years the story looks somewhat different.

If it does go wrong for frontier funds, it may be because they end up becoming victims of their own success: rising stock markets tend to help justify a country's promotion to  the EM index.

High/dry

Is it time to buy into the oil dip? Continued price volatility may prompt opportunistic investors - including those DFMs with a penchant for tactical positions - to do so. But many with a longer-term view would rather sit out the trials and tribulations of certain commodity swings, if more mainstream positioning is anything to go by.

We've discussed the fact that direct commodities exposure tends to come through ETFs, but few wealth firms in our database have turned to dedicated oil and gas positions lately. At the same time, fund selection preferences within oil-heavy markets suggest most DFMs are generally shielded from much of the volatility.

Take UK equity income. Funds in this space often benchmark to the FTSE All Share, an index with exposure of around 14.5 per cent to oil and gas. But an examination of the holdings in our MPS tracker shows that most tend to underweight the sector.

The graph below shows all holdings in terms of their sector exposure relative to that of the FTSE All Share. To give an indication of DFM skin in the game, the most popular selections start on the left.

As the chart shows, just five names here have overweights to oil and gas. The largest exposure sits with Majedie UK Income, which had a 25.4 per cent weighting at the end of September. Several funds have no explicit exposure at all.

Deliberately or not, many fund selectors are cutting back on this particular source of volatility. Whether we are due an increase in tactical activity elsewhere remains to be seen.