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DFMs' lesser global giants and a question of scale

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Going global

Wealth managers just don't like global equity funds that much. The reasoning is pretty straightforward. If investment managers pride themselves on picking the best regions and asset classes, why leave this to someone else?

So Heartwood chief investment officer Graham Bishop speaks for many when he says the following:

It would be outsourcing our responsibilities – we want to construct our own way and asset allocation.

Still, there are times when the need arises - usually when a fund offers exposure to a specific sector or theme. Heartwood itself does use the Kopemik Global All-Cap Equity fund, for example, but this serves as a value play more than anything else.

Then there's Fundsmith Equity. Inevitably, its focus on high-quality companies makes it a bit of an exception to the rule - plenty of wealth managers number Terry Smith's strategy among their core holdings.

But it's not the most popular global offering in our database, nor even the second. Those accolades are taken by a pair of income funds - Artemis Global Income and Newton Global Income.

There's nothing remarkable about the fact these are both dividend strategies: DFMs' need for income is such that it takes in both specialists and generalists in the equity space. But the Newton fund's prominence is a little unexpected, if only because it shows how manager moves don't always have to mean assets heading out the door.

Now run by Nick Clay, the fund was managed by James Harries for more than a decade before his departure for Troy in late 2015. Clay's co-manager Ian Clark also left after just a year on board earlier in 2018 - yet the fund's popularity remains relatively undimmed.

Small packages

Back on home shores, the news of a breakthrough in Brexit talks has provided some respite for sterling, resulting in the currency's biggest rise in three weeks. It's unlikely this will be the last big move.

Brexit uncertainty has turned the UK into something of a grey area as far as returns are concerned, so it's no surprise that allocators are divided on what kind of exposure to maintain. It's just a handful that have decided to build up significant weightings - more on that in future.

For now, given the biggest question mark hangs over the performance of domestic-facing businesses, one theory is that DFMs will head up the market cap scale for safety. However, when it comes to small and mid cap exposure the UK remains a popular choice, as per the chart below.

The usual caveat applies: the chart reflects the number of fund choices but not the size of positions.

More than 20 per cent of UK fund selections captured in our DFM database have a dedicated focus on the smaller end of the scale. This in itself may not suggest an overwhelming preference, but the contrast with other regions is stark.

One possible conclusion is that Brexit uncertainty is in fact driving greater diversification across the market cap scale as DFMs hedge their bets. The same thinking may apply in the US, where the biggest stocks have been driving performance - both positive and negative.

Wealth firms also have much of their equity exposure in these two areas, so may be happier to diversify.

Elsewhere DFMs are either sticking by a limited number of reliable small and mid-cap managers, or having second thoughts about risk. In the volatile emerging markets universe, adding further potential risk by going small may be too much to stomach.

He said/she said

To finish, a look at an unusual to and fro on monetary policy.

Mention quantitative easing to a fund manager at any time in recent years and you'd be likely to hear a familiar gripe: it distorts markets, prevents the useful allocation of capital, inflates prices and so on.

With this in mind, some might be pleased at the prospect of further tightening measures. The Fed is expected to overlook recent market volatility to push on with a December rate rise. Similarly, the ECB has signalled that it will reduce stimulus as planned, despite some lacklustre GDP data from Germany.

But in the UK there's that complicating factor once again: Brexit. Mark Carney has warned that rates may have to rise in a no-deal scenario. But as the FT's Chris Giles notes, markets remain unconvinced: each time the prospect of a hard Brexit has arisen, government bond prices have gone up, suggesting an expectation of looser policy.

What does such an impasse mean for DFMs? The usual mantra about diversification certainly applies, but so does flexibility. This, and the broader outlook for fixed income, explains why many have gone down the strategic bond route.

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