Asset AllocatorJan 11 2019

A close-up on DFMs' active bets; Why wealth transfers are still a problem

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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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Getting active

Standing out from the crowd has become an even bigger issue for asset allocators now the investment masses have started to look somewhat sickly. With indices in the red last year, avoiding the closet trackers has never been more important.

Active share is far from a panacea for fund selectors - and as we’ve highlighted in the past, a swift change on this front could indicate something’s going wrong with the fund in question. But it’s reasonable to expect that DFMs’ preferred portfolios, which by and large do tend to outperform, are more active than their peers. 

To test this theory, we’ve used Morningstar data to chart the active share of discretionaries’ favourite funds – as measured by our MPS tracker – against the relevant active fund peer group across several equity regions.

The results are encouraging on two fronts. Firstly DFM top picks, on average, have higher active share than the constituents of peer groups in every region, which suggests that the core components of model portfolios have managed to stand out from the rest.

The second piece of good news comes from the fact that average active share remains high - above the 70 per cent mark - in Europe, Japan, and even the US, a market that’s often a tough nut to crack.

There is a lag, however, for UK All Companies funds, which display a lower average active share across the sector. DFM selections also have less of an advantage over the peer group.

While the reasons behind this are unclear, it does suggest discretionaries are having to work harder to achieve differentiation on this front. And whether that’s helped or hindered by many wealth managers’ preference for using multiple UK equity funds in the same model portfolio is also a question with no simple answer.

Transfer tribulations

The FCA has published its sector views for the year ahead, and while they’re little more than a reiteration of its current preoccupations, the findings are relevant for DFMs. Not so much the concerns about investing in unsuitable products via “automated discretionary management services” – that’s the suitability issues with robo-advice flagged last May – but the worries about the time it takes to transfer to a different wealth manager.

The regulator says lengthy switching times may be dissuading consumers from moving away from "high cost or low quality" wealth manager. It's a stretch to say such delays might effectively prop up the industry's worst performers at a time when returns and charges are under greater scrutiny, but clearly the FCA thinks it has reason to be concerned.

There's a growing awareness of the need to improve transfer times across the investment industry as a whole: the Transfers and Re-registration working group, which has a particular focus on pension and platform provider transfer times, this week announced the launch of a website that will publish the performance of member companies carrying out transfers.

This is a live issue for DFMs who are finding it increasingly difficult to secure new clients. If adviser outsourcing trends really have peaked, then taking on clients from rivals will form an even greater proportion of new business in future.

And there's room for improvement on the outsourcing front, too. Brooks Macdonald said yesterday it plans to cut back on administration and IT staff to help centralise client account opening and make it easier for advisers to do business with the company. It's another indication that tougher markets may bring more than just asset allocation issues to the fore.

Stranger things

A final note on regulation, now there's little more than 50 working days until March 29. Ten months ago, UK regulators said it was "reasonable" for UK financial services firms to assume they could continue to use passporting rights with the EU. Now they, like others, are stepping up planning for a no-deal Brexit.

From UK asset allocators' perspective, such issues are of relatively minor importance. But it's important to note that the nuclear option for the UK funds industry, that of removing delegation rights, has still not been officially taken off the table.

A change to the rules which allow firms operating in the EU to run their portfolios from outside the trading bloc is still seen as outlandish - unsurprisingly, given any change would mean fund firms either ceasing business with European customers or shifting portfolio managers to the continent. 

The FCA still thinks delegation practices will remain the same even in the event of a no-deal Brexit. But Europe has said little on the subject, and more fund firms are now obtaining licences that give them the ability to manage money from Luxembourg if need be. Highly improbable all this may be, it's still not yet completely impossible.