Train at full speed

New research suggests retail investors are done a disservice by being labelled "dumb money" - when the term's used in opposition to the "smart money" of professional investors, at least.

The study suggests US retail investors are more rational than commonly credited. And theories that are seen as more contentious, such as believing the merits of active management, are shared by professional investors.

In the UK, too, there are areas where wealth managers’ thinking is clearly in line with retail investors’ own. Right now, a particular case in point is Nick Train.

It’s natural for ‘star’ fund managers’ popularity to spread across both the retail and professional spheres, of course. But what’s most striking at the moment is the scale of the backing both groups are giving to Mr Train. UK shares may be out of favour, but Lindsell Train UK Equity remains near the top of the D2C brokers’ Isa/pension popularity charts, and our own MPS tracker shows that more than one wealth manager has been buying in January, too.

This positivity is in large part due to Mr Train’s capacity for outperformance – on both the upside and the downside. Having beaten peers on the way up in 2015, 2016 and 2017, the strategy then shed just 1 per cent in 2018, a year in which both the sector and the All-Share were down by around 10 times that amount.

The fund's style bias and holdings need no introduction - not least because, once again, the manager hasn't bought a single new stock in the past year. But not everyone is as confident in the strategy as they once were. Morningstar data estimates the fund saw its first monthly outflow in four-and-a-half years in January – albeit only to the tune of a paltry £12m.

It may be that some think the levels of outperformance achieved recently now necessitate some kind of mean reversion. Plenty more evidently disagree with that, but the question of sell discipline remains a pertinent one for DFMs. Every wealth manager talks a good game on this front - we’ll be taking a closer look at the reality of the situation later this month.

Not such a strong bond

For strategies designed to run along with a minimum of fuss, absolute return bond funds have spent rather a lot of time in the headlines over the last year.

That was chiefly due to the travails of Gam’s portfolio, which remains in the process of being liquidated. The sector attracted another flicker of attention this week for more conventional reasons: Janus Henderson has become the latest fund firm to move into the space in the UK, via the launch of an onshore version of its existing Absolute Return Income strategy.

But there’s still plenty of doubt whether DFMs have a material appetite for these funds. The chart below shows their current favourites, as judged by our database of wealth managers’ MPS fund picks.

Not surprisingly, TwentyFour is well out in front. Aside from this, there’s little evidence that strategies are capturing the attention. No other fund outside those mentioned has found favour with more than a single DFM.

As with many alternatives, the argument is that the sector will come into its own when the bond (or credit) market finally turns. At that point, loading up on strategic bond funds might no longer suffice.

Yet even though they're preparing for the future, fund firms might still be failing to move with the times. Because plenty of go-anywhere bond strategies levy full-fat active charges - costs that quickly eat into the small positive returns these funds aim to grind out.

Providers say fees are justified by the complex trades employed by managers. But even if those trades don't go awry, there comes a point where investors must question whether the ultimate outcome is at all worth it.

Joining forces

If you’re an adviser looking to outsource to a DFM for the first time - or to shake-up your existing panel of providers - there’s still very little in the way of centralised data to utilise. In the absence of this kind of information, some wealth managers have gone as far as creating their own comprehensive guides to the market. Lingering questions over impartiality have tended to be superseded by the rarity of having all that data in one place.

Gradually, the industry is starting to change. The likes of FE Transmission mark the first attempts at creating a database of performance, while a new due diligence service, DD Hub, aims to cut down the amount of time both advisers and discretionaries spend on the vetting process.

As ever, the strength of these services will come from the breadth of their coverage: the more wealth managers that are on board, the more likely it is that advisers will feel it’s worth their while.

In an age where client acquisition is harder to come by, teaming up can feel counterintuitive to discretionaries. But they should recognise that strength in numbers makes life easier for all parties, and creates a better impression of the industry as a whole.