Crowd control

We might be more than halfway through Q1 already, but the waters remain muddy on investment sentiment. That's most obvious when it comes to consensus trades: there's not much bunching together at the moment. Even the world's most crowded trade has attracted a pretty thin level of support.

The question is how this relates to DFMs' own asset allocations - and, in conjunction with that, whether or not their own fund choices differ from rivals'. 

So we've extended our research on the latter area to encompass a handful of additional asset classes: government bonds, small-cap equity and EMD. We've also taken another look at UK equity growth funds, to see if the dial has moved since our original analysis at the end of October.

As the chart shows, small-cap equity is one area where DFMs don't need to worry too much about crowding. Though a handful of funds have carved out a relatively dominant position - particularly in the UK and US - wealth firms have looked far and wide for holdings, resulting in limited concentration and a long tail of products.

In contrast, discretionaries are much more obviously huddling around a handful of names in the fixed income world. For government bond funds - of both short and regular duration - much of this is down to allocators crowding around certain passives for gilt exposure. In EMD, meanwhile, a limited number of products means the top 10 make up more than half of selections.

But what's arguably most interesting is the relatively high levels of concentration seen in the UK equity space have risen further since October. Is this Brexit uncertainty, a result of some cautiously dipping a toe back in the water, or reflective of a wider trend? We'll look more closely at concentration - and whether it's on the up more broadly - in the coming weeks.

A mass of MPS

Yesterday we suggested fund management M&A had actually been relatively thin on the ground in the UK last year. A few hours later came the news that Atlantic House Fund Management, provider of the Defined Returns fund held by several DFMs, had agreed a merger with consultancy Albemarle Street Partners.

This isn’t the big transaction that blows apart yesterday’s theory. Instead, it seems to confirm that a “different kind of tie-up”, as we called it, is increasingly becoming increasingly prominent in the retail and wholesale investment world.

The deal is perhaps best described as a low-key piece of vertical integration. It isn't quite a provider buying distribution, but AHFM is focused on the institutional market and ASP provides research and model portfolios for advisers.

And it's those models that are the most interesting part of all this, not least for other wealth managers looking on.

From DFMs to advisers, to ratings agencies and consultancies like Albemarle, providers of MPS have long since started emerging from all corners of the market. Combine this with the criss-cross of corporate dealmaking and you get an increasingly complicated retail investment landscape.

Another recent deal stands out, too. Schroders has been busy moving into all kinds of markets lately - being a £440bn AUM company tends to help on that front - but one move has flown slightly under the radar. Benchmark Capital announced just before Christmas that it had bought a 49 per cent stake in Rayner Spencer Mills Research. And as of last summer, Schroders is the controlling party behind Benchmark.

So that’s a fund manager controlling an advice business that has a big stake in a major ratings agency and model portfolio provider. Subtract the ratings agency arm and this isn’t all that unusual nowadays. But it does look like the latest example of how lines are becoming blurred across the investment industry. Standing out has never been more important - or harder to achieve.

Currency calm

For all the talk of the pound (and the dollar) over the past two years, currency markets haven’t really got going for a while now. As the FT points out today, realised volatility for the euro against the dollar, to take one example, sits close to a record low.  

The theory is that the “goldilocks” environment - not too hot, not too cold - that helped equity managers prosper for several years has now returned to forex markets. A weaker outlook for growth is helping ensure monetary policy stays looser for longer. That in turn means lower levels of volatility.

What have wealth managers been doing in response? Our fund selection database shows some have been pondering a rally for the pound - and taking a renewed look at sterling hedged share classes as Brexit looms.

There are no guarantees this would work. A no-deal scenario would shake-up currency moves once again, but anything more positive may not be enough to materially move the needle. And notwithstanding those dabbling with hedging, a calmer outcome would be no bad thing for allocators whose preference is to focus on underlying investments anyway.