asset allocator header image

Asset Allocator

from Asset Allocator

What DFMs did during the sell-off, not-so-smart beta, and Christmas tree chatter

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. 

Forwarded this email? Sign up here.

How DFMs responded to red October

With the sell-off reigniting this week, and figures released yesterday showing investors pulled £1.6bn from retail funds during the October slump, it’s a good time to check in on exactly what DFMs did during that volatility.

We’ve compiled stats from our MPS tracker to gauge wealth manager sentiment, here expressed in the form of changes to the typical balanced model portfolio. The graph below isolates a few key areas of interest and shows how exposures changed on the month.

Clearly, many discretionaries didn’t view the events of October as reason to change their asset allocations. The mantra of monthly rebalancing back to strategic asset allocations remained strong amid the turmoil.

But what did change tells us more than what stayed the same. In particular, the three equity regions highlighted all saw some contrarian buying take place.

For the US and the UK, the reasoning's understandable. The US bore the brunt of the market's sentiment switch but won’t lose its reputation as the driver of equity returns quite so quickly, and the discount offered on UK equities looked a little more attractive in light of a general pullback.

More notable is Japan. A handful of wealth managers think the region might be a relative winner in the coming months. That wasn’t exactly borne out by October - the Topix underperformed the US, UK and Europe in both sterling and local currency terms - but the improving profitability of corporate Japan is attracting interest from Brewin Dolphin and others.

All that said, this wasn’t a month when buying the dip strategies dominated. Allocations to equities - particularly those regions not listed here - typically fell, while cash and alternative weightings generally increased.

For those who didn’t rebalance, this was partly reflective of market movements. But we should also mention the minority who reduced exposures to both alts and cash.

In the latter case, some DFMs with higher cash positions put a bit of money to work amid the volatility. The former group, meanwhile, have started to lose patience with absolute return funds. It's a trend we discussed last month, and yesterday’s IA statistics back that up, too.

Too smart for their own good?

Are funds doing what they say on the tin? It’s a question often asked of active managers, whether they be closet benchmark-huggers or those not following their stated investment style.

There are simpler ways to get exposure to such styles, given the proliferation of factor-oriented smart beta products. Several firms in our database do use these funds, but it’s not as easy as saying they’re all targeting the same thing.

Dividend strategies are a prime example. When it comes to domestic income plays, the iShares UK Dividend ETF and Vanguard’s FTSE UK Equity Income Index fund both feature in MPS ranges from our database.

Structure aside, the two appear to take similar approaches. The iShares offering tracks an index of 50 UK stocks with leading dividend yields. Vanguard’s fund, similarly, tracks an index of high-yield UK income equities.

But when it comes to performance, paths start to diverge. Over three years the iShares ETF is up just 2.4 per cent compared with a 13.8 per cent return from the Vanguard fund. The divergence shrinks over different time horizons, but DFMs will know that smart beta investing isn’t as simple as just picking the dominant style.

As we’ve discussed, this is a problem that even affects conventional passives when providers take different views on what to include within their indices. The scope for divergence gets even greater when it comes to smart beta, given a lack of consensus on what criteria can be used to define factors such as value investing. As the proliferation of factor-based products increases, that haze is only going to grow murkier for fund selectors.

Seasonal share options

As the holiday season looms into view, best start thinking about what might be this year’s Bitcoin: the conversation topic of choice for a distant friend or relative who’s just started “investing” for the first time.

A couple of candidates spring to mind. One is Revolut, the fast-growing prepaid card company. Its forthcoming free share-trading service was highlighted this week by Morgan Stanley as one of several new threats to Hargreaves Lansdown’s margins. Research analysts have a tendency to overegg digital disruptors’ market impact, but there’s no denying Revolut has got a lot of traction in its core business: around a million people use its cards in the UK.

That service has yet to launch fully, so perhaps it’s Monzo that will get tongues wagging around the Christmas tree. One conversation has already started: The mobile-only bank’s ongoing £20m crowdfunding, the largest ever round for a UK fintech firm, was criticised by the Times for allowing customers to use their overdrafts to take part. But Monzo, too, has an engaged user base that may be willing to make the shift to investment - whatever the risks may be. 

The good news (sort of) for these would-be investors is that the bar’s been set low. If for some reason they’d bought and held Bitcoin for a year since last Christmas, they’d now be sitting on losses of around 75 per cent. As harsh introductions to the world of investment go, that’ll be tough to beat.

Get the story behind the stories
The daily newsletter for fund buyers