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Asset Allocator

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A new close-up on DFMs' active bets; Buy lists and rebalancing vs bumpy markets

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Active share, part 2

DFMs will have been pretty content with our recent analysis of their equity fund picks' active share scores: the data showed their choices were ahead of the pack on all fronts. But the high figures being racked up might also conceal a few points to ponder.

That’s demonstrated by the additional research below, which covers the remaining conventional equity sectors as well as one equity income grouping.

First the good news: the most widely held funds in our DFM database are, again, ahead of their broader universe when it comes to the typical level of active share:

In both emerging markets and Asia, the most popular funds in our MPS tracker are ahead of what was already a pretty high average. No problems there.

It’s a slightly different story on the UK income front: these funds tend to have a slightly lower scores, and though DFMs beat the sector average, there’s a case for seeking out strategies that differ even more significantly - the growing worries about dividend concentration risk are reason enough for managers to try to stand out from the crowd.

A more striking result comes from the global equity sector: the average fund’s active share is higher than in any other category. The sheer size of the stock universe perhaps makes this inevitable, but either way it’s not winning over many discretionaries. As we’ve discussed before, DFMs prefer to make asset allocation calls themselves. That often means shunning global equity funds - even if it means sacrificing the most active funds in the market as a result.

Under the bonnet

In aggregate, the MPS changes made by discretionaries in the final few months of 2018 don't look all that significant given the drama going on around them in investment markets. That doesn’t mean wealth managers are resting easy: plenty of firms did shake things up, as we’ll discuss more in the coming days. Another thing worth considering: big market moves mean even rebalancing to a set allocation can involve a noteworthy amount of repositioning.

Tom Becket, chief investment officer at Psigma, notes that the volatility seen last year meant the firm’s quarterly rebalancings tended to involve more significant adjustments:

Last year when we saw almost four seasons in one year…that meant we were constantly upscaling and downscaling positions to take profits and to top up positions where [needed].

If this means a more complicated process for the firm, Mr Becket notes one area where he is trying to keep things simple: buy-list size. Psigma’s list holds between 30 and 35 funds so the firm can closely monitor how its managers are responding to market volatility.

That’s much smaller than many wealth managers' own selections, as we’ve discussed before. Here’s Mr Becket’s take on things:

Some other lists run into the hundreds. I don’t think you can necessarily say with a straight face that you know exactly what’s going on [in a big list] at any point in time. 

Those running bigger lists may well counter that they have greater diversification – and variety – to hand. But the shift in markets is causing plenty to stop and think about their fund selection priorities, and what they mean for portfolio construction.

Sustaining momentum

The growth in sustainable investing has captured the attention of plenty of wealth managers, and the returns of recent years have shown that performance doesn’t have to be sacrificed for principles. Companies who put good governance and long-term thinking at the heart of their strategy are naturally going to outperform over time, or so the thinking goes.

The question, for those working in the retail space, is whether demand is truly starting to take off in the way already observed in the institutional world. Critics caution that investor appetite may start to wither away when markets become more volatile.

So the announcement earlier this week that Aberdeen Standard Investments is to indefinitely postpone the launch of its Global Sustainability trust, after it failed to reach its £200m fundraising target, will raise some eyebrows. 

Is this an “I told you so” moment - or would a similar fate have befallen any equity strategy coming to market in recent weeks? The jury is still out on that one. But if nothing else, a more difficult 2019 should indicate whether sustainable investing really has come of age in the retail world. 

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