DFM vs D2C

As the search for decent diversification continues, plenty of DFMs have increased the size of their buy lists over the past three years. Platform giant Hargreaves Lansdown has today gone the other way, taking an axe to its Wealth 150 selection to create a new (currently 60-strong) Wealth 50 list.

From wealth managers’ point of view, the overhaul brings with it two big questions. The first is how do those funds compare with their own preferences, and the second concerns the kind of deals was Hargreaves able to secure when it comes to fund fees.

Let’s start with the first: of those areas where like-for-like comparisons are possible, around a third of Hargreaves’ picks correspond to DFMs’ favourite funds in a given sector, according to our fund selection database.

That leaves plenty of areas where different choices have been made. The chart below compares the three-year performance of Wealth 50 selections with DFMs’ own top picks, in asset classes where direct comparisons can be made:

The difference is relatively minor for the bond and European equity sectors, but that’s not the case for UK and Asian equities. For the latter, that’s partly due to Hargreaves’ support for First State Asia Focus - whose strong returns haven’t been enough to capture the interest of most wealth managers.

But the biggest discrepancy is in the UK, where the platform continues to back laggards such as Neil Woodford and Tom Dobell at the expense of the likes of Liontrust Special Situations.

That brings us to the second question: price. A scaling back of its buy list has given the platform leverage to renegotiate prices. It now offers active bond funds for as little as 0.22 per cent in the case of Morgan Stanley Sterling Corporate Bond, and the likes of Aviva UK Equity Income for 0.49 per cent. 

Those figures are a useful comparator for DFMs. Not all will have the clout of Hargreaves, but price discussions with fund providers are only going to get more pointed if returns fail to materialise in 2019. Then again, even Hargreaves has been unable to secure the prices it wanted in all areas - and there aren’t many wealth managers who’ll give up on the likes of Fundsmith so readily.

Emerging preferences

As we observed at the end of last year, an emerging market rebound has fast become something of a consensus bet for 2019 - on paper, at least. 

Whether DFMs have enough conviction to materially increase allocations may be a different matter: long-term prospects may remain healthy, and a short-term bounce might have already begun, but the past decade has repeatedly shown just how volatile EM positions can be over a typical investment time horizon.

China, as ever, is the main focal point, and a weaker dollar and optimism over trade war talks are helping soothe some nerves at the start of 2019. But it’s far from the only EM bogeyman - indeed, issues elsewhere have seen DFMs increasingly opt for dedicated Asia ex-Japan exposure       at the expense of generalist emerging market funds.

With the balance of risks arguably now spread more evenly across the asset class, we’ve analysed the 20 most popular EM equity funds with wealth managers, as judged by our MPS tracker, to find out where managers are putting their money.

India remains the clear winner: 16 of the 20 funds are still overweight the country. And for all the talk of Brazil’s market rally, it’s actually Russia that’s the next most popular bet: 13 portfolios are overweight compared with 11 for Brazil and 9 for China.

The most telling stat of all is arguably the attitude taken to other countries: the ‘Brics’ concept might have long since been consigned to the great dustbin of outdated investment theories, but there’s little sign of a shift elsewhere. Just three managers are overweight Taiwan, and only six have more than the benchmark allocation in South Korea or South Africa. Whether or not it’s a new dawn for EMs, old habits appear to be dying hard.

Buxton bonus?

In the footballing world, it's a cliché for cash-strapped managers to say a player returning from injury is “as good as a new signing”. But fund selectors might just be thinking something similar following the news that Merian’s Richard Buxton is to step down from his role as CEO to focus on running money.

Drawing a direct line between Mr Buxton’s time in charge of his firm and his UK Alpha fund’s underperformance may be unfair - investment style is also a factor, among other reasons. But the time spent spinning off Merian from its parent company last year is unlikely to have been a comfortable scenario for DFMs who continue to back the manager.

Sure enough, our fund selection database shows Merian UK Alpha is less popular among wealth firms than it once was. That said, it's tended to be the very biggest DFMs who've retained the faith within their model portfolios, which means a sizeable amount of client cash is still backing a turnaround in performance.

And it almost goes without saying that one big test for the portfolio is hastening near: Mr Buxton is among those who believe a no-deal Brexit won't happen. He'll now have as much time as the next UK manager to stress-test that theory in the coming weeks.