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An illiquid asset lifeline; Have DFMs won the vertical integration battle?

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. 

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Rethinking the property mix

Last month, in our very first newsletter, we discussed the way that the FCA's consultation paper on open-ended property funds might produce one very specific winner. What we didn't discuss is another reason why the shift to a 50/50 property model might become more notable - changes to the way in which Distribution Technology classifies the asset class.

DT's Dynamic Planner risk rating tool remains the most popular way for DFMs' adviser clients to assess model portfolio propositions. Property accounts for five per cent of the specified asset allocation for most DT risk grades. 

But as of the third quarter, this benchmark has split from 100 per cent bricks and mortar property to a 50/50 split between physical and listed property.

Here's Abhi Chatterjee, Dynamic Planner's head of asset risk modelling, on the move:

When considering the asset allocation changes, we felt that using a mix of Reits and physical property was an appropriate way to invest in the “property” asset class. To cater for the increased volatility and correlation that the mix provided, we decided to cut down our holdings in the property bucket from 8 per cent to 5 per cent. This, we felt, was the best way to balance the reduced risk from liquidity against the increased risk of correlation in the portfolio.

Clearly, these allocations are guidelines rather than instructions that must be rigidly followed by wealth managers. But the change might still be a relief to those looking to shift away from open-ended funds holding illiquid assets. With our database already showing that DFMs are starting to split their bets, the change provides one more incentive for taking a more balanced approach to the asset class in the face of liquidity and regulatory risks.

A vote of confidence for DFMs

With all the corporate activity that we’ve seen in the fund and wealth arena again this year, it’s easy to miss the finer details of every deal. 

Management’s justifications for their decisions are even easier to gloss over: sometimes it can be tempting to think that if you’ve read one rationale for taking over a competitor, you’ve read them all.

But from wealth managers’ perspective, there was one announcement this summer that is worth further consideration than it's received so far: Investec’s decision to spin off its asset management arm.

What particularly stands out is the following paragraph from the RNS statement:

There are compelling current and potential linkages between the Specialist Banking and Wealth & Investment businesses, however, there are limited synergies between these two businesses and Investec Asset Management.

An explicit statement, then, that there's little extra to be gained from owning a wealth manager and a product provider. That would seem to fly in the face of all that asset management shareholders have been told about vertical integration over the past few years. 

And it's not just Investec: the separation of Richard Buxton’s Merian from its parent Quilter has severed the link between asset and discretionary management there, too. 

From the DFM perspective, it's very good news: an acknowledgement that internal practices are too robust to permit a company's fund arm to shift its products onto the wealth manager's buy list without good reason.

This has to be the right conclusion. With advisers themselves forming a growing part of DFMs' customer base, clients are more well-informed than ever. They'll be reassured by these moves, if they ever doubted in the first place. And shareholders, too, are having to accept the fact that the whole merit of fund selection processes rests on their independence and freedom from external influence.

Bullet dodged?

In the absence of rising markets, one way to outperform benchmarks comes down to what you don’t own. And DFMs have certainly dodged a bullet in the form of material exposure to one of the week’s major stock blow-ups.

Thomas Cook shares sold off heavily on Tuesday in the wake of its second profit warning in two months, and have not fared much better since: they fell steeply in early trading yesterday before recovering somewhat. With the company’s trading update out this morning, shares were relatively flat.

But Morningstar figures suggest many funds had already sold on previous news. Some names which are listed as still having exposure at the end of October - such as Aviva Investors UK Opportunities - are not held by DFMs in our MPS tracker.

Another big move has been for Restaurant Group shares. The company secured shareholder backing for a takeover of Wagamama, but only in the face of heavy opposition. Its shares fell heavily yesterday and continued this morning, selling off by up to 30 per cent.

Some managers appear to have been caught out. JOHCM UK Dynamic, Rathbone Income and Artemis UK Special Situations all have positions of around 2 per cent, according to Morningstar. The same applies for the SDL UK Buffettology fund.

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