Mixing it up

Property fund wobbles were thrust back in the spotlight last month when we highlighted the latest shift from offer to bid pricing. With that in mind, an examination of DFMs’ own exposures to the asset class feels appropriate. Have the events of 2016, and the criticism that followed, truly sparked a change of tack from discretionaries, or do old habits die hard?

Real estate, in its many guises, still forms a pretty small part of the typical wealth manager’s balanced model portfolio. The average weighting is just under 5 per cent, and around a fifth of all firms still shun the asset class entirely. 

Those who do commit have more decisions to make: when it comes to the split between listed property and open-ended exposure, we’ve discussed previously how several firms are now seeking to combine these attributes in a single fund holding. But as the chart below shows, traditional approaches remain dominant.

While the single most popular fund in the asset class provides a mix of listed and physical property positions, it’s an isolated example. Dedicated property equity or bricks and mortar funds are still the way forward for the majority.

One point of note: closed-ended exposures do include infrastructure investment trusts. DFMs have shown more interest in this sector in recent years, but weightings don’t really tend to move the dial that much. 

Plenty of discretionaries prefer to blend exposures themselves: what the chart doesn’t show is that around a quarter of wealth managers hold funds from more than one of these sub-sectors.

That makes sense, given all have their potential weak points, from a lack of diversification in the case of equities to a lack of liquidity elsewhere. When it comes to property, there may be no one right answer, but there can occasionally be a wrong one.

Risky business

Earlier this week we touched on one common industry trend: the sight of DFMs launching more specialised model portfolios. This expansion is partly based on clients approaching wealth managers with more specific needs, as well as the belief that the market's already saturated with conventional risk-rated models.

But as with most assumptions, things aren't quite that simple. As our chart shows, the coverage of different parts of the risk spectrum still varies quite significantly in one particular area.

Of the wealth firms that use Dynamic Planner risk ratings, data from our MPS tracker shows that most, unsurprisingly, concentrate on the middle ground. Some 95 per cent of DFMs have something to offer for risk level 5, the home of most balanced portfolios. And more than 70 per cent operate on levels 4 and 6, where income and growth strategies tend to fall.

But while discretionaries aren't ignoring the need for more conservative or more aggressive offerings either, it's the latter where supply (and demand) tends to fall away.

Fewer than one in ten offer a model with a rating of 8. Models rated 9 and 10 aren't shown in the chart, in part because they're almost non-existent. DFMs may have more risk appetite than their asset allocator rivals, but even they and their clients draw the line at this point. 

Yielding ground

Data released this week has reemphasised the attraction of UK equity income at the moment: as with other asset classes, the falls of 2018 mean yields are looking pretty healthy right now. 

The latest Link Asset Services Dividend Monitor shows payouts rose 5 per cent in 2018, with the UK market yielding an estimated 4.8 per cent this year. That’s the highest level for almost three decades, and well above the 3.6 per cent seen just 12 months ago.

We noted a couple of weeks ago that half of DFMs’ UK income favourites yielded 4.5 per cent even prior to December’s market falls. Fast forward to the start of this month and almost every fund is in this boat: opportunities abound.

This strength is always in the eye of the beholder, of course. But the Dividend Monitor team suggests that worries over unsustainable yields are overdone. The 4.8 per cent market yield implies an “overly pessimistic view”, according to the firm, which claims that even a global recession or disorderly Brexit would mean a 10-15 per cent drop in payouts, not the 25 per cent currently priced in. A reason to be cheerful.