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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After years of healthy growth, the DFM market now sits at something of a crossroads. The private client market remains steady, but the hunt for new customers is as tough as ever. And there are plenty of suggestions that the erstwhile driver of growth - financial advisers outsourcing to discretionaries - has started to peak.
This latter trend has been accompanied by the sight of some advisers deciding to take their investment business back in house. Cost is a factor, but so too is the renewed belief they can do just as good a job at managing money themselves.
One prominent wealth manager is now preparing to launch a unitised version of its balanced model portfolio: the thinking being that advisers will be able to hold the fund at the heart of their own investment offering. In the past, this strategy has led to advisers being told they're “doubling up” on asset allocation, but a core/satellite investment strategy has its merits.
The wealth manager in question thinks there will be plenty of peers following suit in the coming months. And our own MPS database indicates several DFMs already offer unitised versions of their models. This has implications for asset allocation, too: fund structures aren’t bound by the limits of MPS when it comes to liquidity or the underlying fund choice available on a given investment platform.
If this shift takes hold it will effectively mean the industry has come full circle from the time when many viewed conventional multi-asset funds as ill-suited to the needs of the modern client. It will also put wealth managers in even closer competition with traditional fund providers, ie asset managers.
One final question is whether trickier markets will convince advisers of the cost benefits of DIY, or make them rethink their confidence in their own expertise. New ex-post disclosure statements for clients, currently being drawn up to reflect performance and charges for the first year of the Mifid II era, might have some bearing on that. But we’ll have to wait til 2019 to find out more.
US picks: Turning defensive
The US equity market's challenges for active managers need no introduction. The past 12 months have proved a banner year on that front: a small group of tech stocks spurred both a rapid rise and then an equally swift slump in major benchmarks. The situation’s barely any better when it comes to dividends: the S&P 500 barely yields 2 per cent, and a payout ratio of under 50 per cent is below that of every other major developed market (ex Japan).
So on the surface it’s a little surprising that DFMs' go-to US equity fund - according to our fund selection database - isn’t a tracker, or even a tech-focused growth play, but an equity income fund. The chart below shows the top 10.
JPM US Equity Income is well known to most wealth managers at this point, but it’s worth emphasising just why it’s become so popular.
In keeping with the wider market, a stated dividend yield of 1.8 per cent doesn’t move the dial much when it comes to payouts. Effectively, then, it’s being held as a defensive US equity fund that doesn’t have much opportunity cost to it. The last few months have shown it can protect on the downside, but the nature of the bull market - in which quality has been prized almost as much as tech names - means the fund’s also beaten the S&P in almost every year since the crunch.
One lingering question, though, is how will its overweight to financials perform at a time when investors are starting to get a little worried about US growth.
That aside, DFMs don’t think they can really find these qualities in other equity income funds in the region. Aviva’s fund is found in the top 10 above, but in much lower quantities.
The other names are relatively straightforward: a surfeit of trackers (five of them), the North American variant of Ian Heslop’s systematic juggernaut, and Baillie Gifford’s tech-heavy offering. DFMs’ US equity picks can tend to extend far and wide in the search for alpha. But as we've said before, when it comes to core exposures, few stray from the most popular funds.
Another fine mess
From markets’ perspective, that’s more or less correct. Monday’s events had some familiar consequences. The pound fell to its lowest level since last April, giving another boost to overseas equity fund holdings. The probabilities of a no-deal Brexit or an extension of Article 50 are, arguably, more or less even. And there is once again little sign of when the fog of uncertainty might clear.
The meaningful vote could be delayed for as long as six weeks, to January 21 - and some quarters suggest there’s now nothing to stop it taking place as late as the day before our departure from the EU. All that means it will be a brave wealth manager who opts to materially change their UK equity exposure in the interim.
The FTSE 100 is still being given some support by the pound’s weakness, but the inverse correlation of recent years - whereby it rises every time sterling falls - has withered away. On the other hand, it won't have escaped the attention of DFMs that UK domestic stocks are now approaching their post-referendum lows, and the FTSE 250 is close to bear market territory. At some point, something has to give. Sadly, we’re no closer to finding out when, or what, that is.