DFMs' favourite fund firms

Healthy returns may have been in short supply in recent months, but DFMs are still spoiled for choice when it comes to the sheer number of providers queuing up at their doors. From big to small, household names to outside entrants, there are more than enough asset managers interested in doing business with wealth firms - in mainstream asset classes, at least.

We’ve discussed many of the most popular individual fund picks among DFMs over the past few weeks. But having one standout fund doesn’t always mean widespread success. With that in mind, we've worked through our MPS tracker to identify the fund firms who most consistently strike a chord with discretionaries. Our first chart, below, lays out the results from the fixed income universe.

The preference for boutiques is immediately evident. TwentyFour's decision to delve into more esoteric parts of the bond universe has long since established it as a consensus choice. But at the same time, RLAM and Pimco haven't lost their status as bond giants. And M&G's broad selection of fixed income offerings means it still features in the top five even as Richard Woolnough's Optimal Income fund is battered by outflows.

Our second chart shows the most popular names in the equity space.

Again, some smaller firms punch above their weight. Merian, whose Global Equity Absolute Return fund remains the most popular name in our database, sits alongside Artemis in the top five.

The more established names are here, too: Schroders tops the chart by some distance, in part thanks to the popularity of its covered call income range. But there's little difference between the next four and indeed the providers who sit just outside the top five. That might suggest brand loyalty is rightly continuing to fade in importance for wealth firms who are anxious to find returns wherever they can.

A question of trust

Not surprisingly, fund managers who run open and closed-ended versions of the same equity strategy tend to find much greater DFM support for the former. But there are cases where discretionaries do the opposite: our MPS tracker shows that trust purchases aren't entirely confined to niche or illiquid asset classes.

Smith & Williamson is one firm that often opts for a trust over a fund. Its MPS holdings include Baillie Gifford’s Japan Trust, the Troy Income and Growth Trust and Aberdeen's Edinburgh Dragon instead of their open-ended counterparts. As well as gearing, S&W's James Burns notes that trusts often have greater freedom to hunt in other parts of the market such as small-caps, making them more attractive in a long-running bull market.

Close Brothers favours Jupiter European Opportunities Trust over Alexander Darwall’s open-ended fund for similar reasons. But the wealth manager has taken a less conventional step on another front, holding both versions of Coupland Cardiff’s Japan Income and Growth fund. It says this permits it to capitalise on the trust’s advantages while maintaining liquidity via the open-ended fund.

Here’s investment director Matthew Stanesby:

The trust has about 20 per cent gearing. When we are looking for income that helps. The trust is cheaper, [and] it can get down to some small-cap names. But it’s a bit smaller and a bit less liquid. If we need to add something quickly we can use the open-ended fund.

But here, too, uneasy markets may prompt a reassessment of the balance of risks - particularly as trusts are exposed to both gearing and discount risk. Smith & Williamson has already reduced exposure to Baillie Gifford’s Japan trust with these factors in mind, and others may ultimately share their concerns.

Sell struggles

As occasionally happens, an academic study of investing behaviour attracted the attention of mainstream news outlets last week. This time, that was because the findings suggest a remarkable weakness on the part of institutional investors: while their buying decisions add value, their selling strategies are so poor that they consistently underperform even a randomised process.

To quote Bloomberg, the results do tally with many investors’ stated investment strategies: “buying is about fundamentals, but for selling it’s usually about price action”. Whether that action is a share having jumped or slumped depends on the individual. Either way, selling is principally seen as a way to fund new purchases.

Do the same behavioural traits apply to fund selectors? On one level, there’s little ground to think otherwise: underperformance or stellar returns are often cited as reason enough to change course. But there are other factors driving decisions on collectives that aren’t so applicable to shares: a fund’s size becoming too large, a manager leaving, style drift. 

As more DFMs start to consider whether they should be making changes to their portfolios, these early warning systems should help prevent them from making the same mistakes as their underlying managers.