Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs. We know you're bombarded with information, so each day we'll be sifting through the mass to bring you what you need to know, backed up by exclusive data and research.
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Reports of the multi-manager fund’s death have been greatly exaggerated. But it is true that funds of funds now look very different in the modern age: most are now classified under the catch-all term of multi-asset, and many have at their core either a fettered or a passive strategy - or both.
What's more, the amount of money being gathered by some of these strategies mean they're still a serious threat to discretionaries. And our latest research suggests DFMs can't fall back on claiming that multi-managers are simply populating portfolios with the same old funds.
Because as the chart below shows, active fund selection efforts are alive and well - and raise some questions about how much value is being added by DFMs' own attempts.
The chart groups multi-managers’ selections into three categories, as ranked by our database of wealth manager fund picks: strategies that are among the most popular with DFMs; funds held by a handful of discretionaries; and funds that aren’t held by any wealth manager model portfolios at all.
For ease of comparison, we’ve excluded both passive funds and those run by a given multi-manager’s parent company.
The findings suggest that most funds of funds have managed to unearth a big chunk of strategies that simply aren’t being used by discretionaries: in some cases, more than 20 per cent of holdings fall into this category.
So does this mean DFMs have dropped the ball on fund selection? Not necessarily. Some of the choices that are unique to multi-managers include those that have simply fallen from favour with discretionaries: the likes of Axa Framlington UK Select Opportunities or Invesco Perpetual Tactical Bond.
Equally, however, there are plenty of providers that may warrant further attention. And these aren’t just unusual alts choices; many are found in the bond and equity space. From Zadig and Eleva’s European equities strategies, to Usonian in Japan and Payden & Rygel in the US, multi-managers are consistently finding their own furrows to plough.
This doesn’t mean wealth managers aren't already aware of these options, or don’t have hidden gems of their own to fall back on. But as asset concentration increases, DFMs should stop and consider whether models are becoming too reliant on the same set of strategies - and whether they could stand to benefit from adding some idiosyncratic choices to their portfolios.
As one door closes...
One way to revitalise portfolios might be to simply bite the bullet more quickly when it comes to prospective inclusions. Portfolio turnover is never to be welcomed for its own sake, but sometimes there can be behavioural barriers standing in the way, too.
Tom Yeowart, manager of the Troy Spectrum fund, is conscious of this. He says recognising this potential hurdle has been an important lesson learned during his time running the strategy:
Having identified a good fund, in the past I’ve sometimes waited for a big sell-off before investing. I now think it’s better to put a toe in the water. That also helps reduce weightings in other funds [that you may be starting to doubt].
I’ve gravitated towards putting greater weight behind my stronger convictions…and becoming quicker to sell down funds when conviction has fallen.
But when it comes to differentiation, sometimes it’s the older fund selections that can help. There’s arguably no better way to stand out than by keeping hold of strategies that subsequently soft-close to other investors. Mr Yeowart’s largest position, Egerton Capital Equity, is a case in point.
Established strategies also have another obvious advantage over newer peers: they’ve survived through an entire market cycle. That can prove invaluable at a time when even ten-year track records no longer show the impact of the 2008 crisis.
The flipside, of course, is that owning a soft-closed fund can mean holders are less inclined to sell out even when performance, or other signs, tell them to do so. The fine balance of fund selection always tends to produce as many questions as it does answers.
At the Vanguard
The unspoken presence looming over all of today’s discussion of multi-manager fund selection, and indeed over discretionaries’ business in general, is Vanguard and its LifeStrategy range.
The latest FTAdviser.com podcast discusses this topic in more detail. It features Minesh Patel, managing director of advisory firm EA Financial Solutions, explaining why he’s allocating more client money to Vanguard at the expense of DFMs.
His comments reflect some of the issues we’ve spoken about above: LifeStrategy may be a low-cost passive offering, but it's model portfolios that Mr Patel thinks are becoming “more commoditised” and increasingly similar to one another. Food for thought for wealth managers, particularly as client acquisition becomes ever more difficult.