Q4 buys and sells

Topsy-turvy markets have meant plenty of work going on under the bonnet for DFMs. Some are only just starting to implement changes to their thinking, and others are finding they’re having to run just to stand still. But there's also plenty of evidence of more visible activity, in the shape of fund switches.

Plenty of these relate to the ongoing issues with alternatives that we’ve documented in recent weeks. Thesis and Rathbones have both cut back on some exposures here: the former in favour of money market funds in a bid to better preserve capital, the latter calling time on Aspect Diversified Trends in favour of other alternative plays.

And the search for different styles continues: Quilter Cheviot’s MPS team has added a new position in the Mygale Event Driven strategy to diversify its own alternatives exposure - the first time this has been featured in our database of DFM fund selection holdings.

More popular funds have also come under scrutiny. Parmenion’s Andrew Gilbert notes the team has sold the Rathbones Global Opps fund on the view that synchronised global growth is now becoming more uneven; volatility concerns also played a part.

Thesis head of research Matthew Hoggarth points out the firm has also consolidated its property weighting, moving away from L&G Property - which has a 5.5 per cent pricing spread that can make things tricky for model portfolios - in favour of its position in the single-price Kames Property Income.

Many of these switches are about positioning models for a different kind of year ahead. That’s the case at Brooks Macdonald, whose models are starting to focus more closely on liquidity and overall risk exposure. The firm has shifted away from sterling investment grade credit, which has meant lower exposure to the likes of Fidelity Moneybuilder Income and M&G Optimal Income.

Deputy CIO Edward Park says such shifts are likely to be “the beginning of a series of asset allocation changes as we move away from credit, towards sovereigns, and move our equity weightings to neutral”. A healthy January won’t have prevented others from thinking similar thoughts in recent weeks.

Open sesame

At the end of last year we stressed just how many of wealth managers’ favourite fund choices were approaching their capacity limits. Those constraints may have been notional in some cases - getting into a fund that’s nearing its maximum size isn’t as difficult as some asset managers publicly claim. But the trend did emphasise the fact that DFMs still tend to hunt in packs when it comes to their core fund selections.

December’s sharp falls did at least give providers some breathing room on this front - and the early 2019 rebound hasn’t yet brought investors back to where they were at the start of that month, let alone the start of that quarter.

As a result, the new year has been accompanied by the sight of funds reopening rather than soft closing. One fund, to be precise: Downing said yesterday it had reopened its UK Micro-Cap Growth fund after a drop in assets. 

Sadly for DFMs, this is one offering that’s always been too small rather than too big: a maximum capacity of £20m makes it unfeasible for many of the bigger players to use in their model portfolios.

But other micro-cap strategies have garnered some attention from wealth managers - particularly if you consider that discretionaries typically tend to shun small-cap offerings. In that context, the flicker of interest in micro-caps suggested by our fund selection database is worth noting.

The most popular fund here is the Gresham House (formerly Livingbridge) UK Micro-Cap strategy. At £170m, that’s well above Downing’s stated limit - but it’s far from the largest offering. That perhaps dubious honour goes to Marlborough’s micro-cap fund. A size of £1.1bn should tell you all you need to know about the inconsistency of definitions in the sector. 

All that said, performance across the space is reassuring. Micro-cap funds managed to outperform UK smaller companies strategies on the upside over the last few years, and their end-of-2018 drawdown wasn’t quite so bad either. The difference between the two isn’t big enough to suggest micro-caps have simply sidestepped domestic stocks’ Brexit issues, but it is worth closer investigation.

So far, so good

We noted yesterday that DFMs would fondly remember January 2019, but it turns out plenty of good news was yet to come. The not-entirely-expected Fed pause was accompanied by fresh hopes of a trade war resolution and even a delegation agreement between the UK and EU.

That put the cherry on a good month for wealth managers. And if 2018 was a year in which nothing worked, January was the month when everything did: every IA sector ended January in the black.

Can this state of serenity continue for much longer? Plenty of DFMs are starting to hunker down regardless and bellwether stocks like the Faangs are still emphasising uncertain outlooks. But the macro should continue to override the micro for now: whatever else happens this year, the Fed has bought at least a little more time for late-cycle investors.