Shunning big funds

With crowded trades causing buy list concerns, it's no surprise that DFMs are keen to pick out so-called hidden gem funds. And by the same token, the dominance of larger products doesn't mean that all big funds have wealth management backing: there are still some high-profile absences.

It's a rare occurrence with some common causes: funds hit a certain level of assets, a product no longer sits well in portfolios, or performance has simply slipped away.

To identify some of these names, we took a brief look at four fund sectors - UK All Companies, EM and European equities, and high-yield debt - and compared them with our fund holdings database.

There are some cases of DFMs turning away from well-known UK managers. None of the firms in our MPS tracker currently hold Steve Davies' Jupiter UK Growth fund. Similarly, the recent poor performance - and retirement plans - of Nigel Thomas mean Axa Framlington UK Select Opportunities doesn't feature either.

In some cases, the bigger funds lose out because DFMs are holding other offerings from the same provider. That's likely the case for the high-yield bond funds run by M&G and RLAM. But high-profile absences aren't just confined to UK equities: Janus Henderson European Growth is another example.

In both Europe and EM, some of the big funds failing to break through come from providers that are less well known in the UK, like Comgest and Robeco. We'll be discussing the European and US fund firms that have attempted to break into the UK market - and whether they've gained particular support from DFMs - in more detail next week.  

Unsurprisingly, DFMs are generally more selective when it comes to using IA sector members. See our chart below as evidence:

The Fundsmith love affair

The end of the year is a time for reflection, and occasionally reconsideration. Late 2018 will be no different for asset allocators, particularly after the events of the past two months. 

That slump means it’s the underperformers that will be giving most pause for thought. But when attention turns to the winners, one name's still standing out.

Fundsmith Equity has come up trumps again in 2018, and could yet pull another double-digit return out of the bag for the year. This is one big fund that few are shying away from. But paradoxically, its continued success means suggestions that now’s the time to sell are never in short supply - so far, those suggestions have consistently been proven wrong.

Rather than rehearse those arguments, we've decided to examine the fund’s popularity among DFMs in our database to see if any are starting to shy away.

The answer, in short, is “not really”. Fundsmith accounts for a hefty proportion of all DFM global equity picks, and there's little sign of that changing.

We’ve recorded just one instance of a wealth manager exiting the fund in their model portfolios in 2018: Parallel IM took profits from the fund earlier this year in favour of a less concentrated long/short global equity offering. 

But DFMs in general are content to keep running this particular winner. That’s in keeping with a wider trend. Changing asset allocation calls several years into a bull market (for both bonds and equities) is not easy.

Under the circumstances, staying put and waiting for value to emerge looks sensible. It’s up to discretionaries to decide whether the last two months have now changed that equation.

Spoils won't be evenly shared

A research note published yesterday by RBC renews the argument it made last month: pension transfers represents a potential £1trn opportunity for wealth managers.

The number is large enough to be almost meaningless, but the assumptions are worth considering. The analysts say that pension transfer rates are likely to dip by about 5 per cent this year, but will then surge by 25 per cent in 2019-20 as pent-up demand is unlocked. 

That’s another huge leap when you factor in the increase in transfer rates seen last year in particular. RBC says the surge will come from transfers that are being delayed this year as providers adjust to potential new FCA regulations or put business on hold in light of a recent High Court ruling.

We’ve already discussed how the shift in the pensions regime is making itself felt in the fund world - pension wrappers now account for a far greater proportion of retail fund flows than Isas or anything else. That said, there’s still reason for asset allocators to be wary that too much is being read into this change. 

The average DB transfer value was £235,000 as of October, which as RBC says is substantial enough to move the dial. Capturing it is a different question for wealth managers.

Early signs are that existing winners, like St James’s Place or D2C platforms, are taking up much of the slack. Here, too, the big are getting bigger - and the small are finding it more difficult to survive. Pensions money may require a rethink of asset allocation priorities, but it won’t be the rising tide that lifts all boats.