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Asset Allocator

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DFM crowded trades, a Kames calamity, and winter window dressing

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Crowded trades part three

Where are DFMs’ fund picks standing out from their peers? It’s a question we’ve been seeking to answer in recent weeks by gauging the extent to which wealth firms are crowding around the most popular strategies.

The previous analysis has taken in the likes of alternatives, and an unexpected pile-up in Japan. Our final selection takes a different range of sectors: Europe, EM and global equity funds, as well as property vehicles. The results are below:

When it comes to global equities, the results are not dissimilar from some of our previous findings: the 10 most popular names represent around half of the selections. On this occasion, we've included income funds alongside growth offerings - many DFMs only go global when they need income.

For Europe, many DFMs are still backing the most popular funds, but this concentration is diluted somewhat by a long tail of less widely held picks.

However, concentration is notably lower in the other areas, suggesting EM equities and property are universes where wealth manager buy lists do differ significantly.

Emerging markets remain an intriguing area for allocators. As we’ve discussed on several occasions, it’s an area where discretionaries' picks have struggled to beat their wider fund universe.

So it’s possible, in a difficult asset class, that DFMs are now seeking either a niche form of exposure (including frontier markets) or are more willing to try out a different approach.

The low level of concentration in property in part reflects the sheer breadth of available options in this universe, and how buyers get pickier when it comes to finding portfolio diversifiers. It's a similar story to that witnessed in the alternatives sector - except here there's not even a consensus on the top picks.

Calamity at Kames

Some bad news for Kames last week, as the asset manager was forced to reshuffle its bond teams again after losing four fund managers. Stephen Snowden, David Ennett, Stephen Baines and Juan Valenzuela have all left, following on from the departure of Phil Milburn and David Roberts last year.

The exits emphasise that succession planning, or team management processes, do have their limits: it's no good having bench strength if the entire squad decides to up sticks at once.

And an exodus on this scale makes it difficult for wealth managers to sit on their hands. Unsurprisingly it’s Snowden, the highest profile of the departing managers, who'll likely give DFMs the most pause for thought.

Our MPS tracker shows that four firms currently hold the Kames Investment Grade Bond fund, previously run by Snowden alongside Euan McNeil, in their model portfolio ranges. It's now odds on to suffer the same fate as the firm's other hitherto flagship funds, to which the damage has already been done.

Milburn and Roberts previously ran the firm's Strategic Bond fund, with the former also partly responsible for the High Yield strategy. Their departure for Liontrust last year was accompanied by a dwindling of interest in both strategies from wealth managers.

So the exit of the current management teams won't hit Kames particularly hard on this front - because not a single wealth manager MPS range tracked by our database still holds either portfolio.

A lone holder of an offshore version of the strat bond fund is all that remains. We'll be taking a closer look at the successes and failures of succession planning, and the way in which DFMs are increasingly taking a different approach to fund manager departures, next week.

Winter window dressing

The weekend trade war ceasefire is a quintessential can-kicking exercise: a 90-day delay to the 1 January tariff increases planned by the US.

As ever, the devil will be in the detail: China's description of the agreement is somewhat different from the headlines we've seen over here. And the overnight news on auto tariffs also requires further inspection. 

But at its heart, this is an end-of-year fudge that has been welcomed by investors, as shown by the jump in global equities overnight and this morning.

These aren't the only concessionary noises being made at the moment: the Fed's slightly more dovish tone last week was also seized upon by allocators. A December rate hike is still odds on, but the central bank has conceded rates may be slightly closer to neutral than it previously suggested. 

The rush to interpret Jerome Powell's words as being good news masks what the FT is already describing as a "murkier" policy in 2019: it predicts the Fed will take a more "improvisational" approach rather than the hand-holding of recent years.

So plenty of risks remain on both trade and rates. But investors appear to be content to leave these difficult decisions to 2019; the latest pronouncements give them room to do just that. 

A cynic would say the final month of 2018 requires plenty of window dressing if the year is to be remembered as anything other than a poor one. And the foundations have been laid for another year-end rally - particularly if you believe that markets won't react that badly to events in Parliament next week.

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