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DFMs' immaturity problem, the 119-year-old index secret, and an unwelcome surprise

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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Tracking track records

Experience only comes with time, but even that's not enough nowadays for fund selectors. The 2008 financial crisis may be lingering long in the memory, but the number of fund managers who actually ran money in its midst continues to dwindle.

That's partly why some DFMs say they find value in episodes like the fourth quarter of last year - sudden drawdowns can help indicate how their managers might fare in a more concerted slump. But equally, plenty of problems might not emerge until the real thing arrives.

To examine the issue in more detail, we’ve run the rule over the several hundred equity funds currently being used by discretionaries in their model portfolios, according to our MPS tracker. We’ve split each of the main asset classes between those funds whose lead managers were in situ prior to September 2008, and those who have since come on board:


In total, fewer than one in three fund choices were being run by their current managers in mid-2008. Not too bad, some might say. But this headline figure is flattered slightly by UK funds, which make up just over a quarter of the total universe. Maturity is even more evident here: 43 per cent of managers have made the grade.

In contrast, managers of US, emerging market and global equity funds can count just one in five of their number as sufficiently experienced. There might be some fuzziness in the data - overseas equity managers could have run non-Ucits versions of their portfolios prior to the current structures launching - but other factors are also plausible.

It’s reasonable to conclude that DFMs are aware of the tried and tested domestic equity managers, but that the search for diversification and differentiation abroad often leads both providers and buyers to seek out newer strategies. And history will ultimately judge only some of those choices to be correct.

A century of underperformance

When it comes to track records, it’s easy to forget that emerging markets as an asset class are still relatively new themselves. That point is made in the latest Credit Suisse Global Investment Returns Yearbook, published last week.

The first EM composite index appeared in 1985, with the MSCI equivalent arriving three years later. That makes long-term comparisons, of the kind favoured by the Credit Suisse authors, difficult to work out. But they’ve found a way, creating an index that extends back to 1900 and adds in data as it becomes available along the way. Countries are also removed from the index once they become “developed”, like Singapore in 1970. 

The findings challenge the theory of EMs’ long-term outperformance. Annualised returns from 119 years in developed markets stand at 8.2 per cent, compared with 7.2 per cent for emerging markets. But there is one big caveat: EMs have consistently outperformed since 1950. The issue is that a slump in the 1940s was big enough to affect the entire dataset - needless to say, that won’t unduly concern modern-day clients.

Does this data have any relevance for current thinking? Perhaps. One perennial underperformer is the domestic Chinese market. The Credit Suisse analysts look at the factors behind this, and reach some familiar conclusions: governance and an absence of institutional investors. But they also note that A-Shares’ travails have given them a low correlation with other markets. As a result, “above all, [they] provide a potential diversification opportunity”.

That’s an argument that could be made for any underperformer in a bull market, admittedly. But as China’s presence in EM indices continues to increase, wealth managers will find themselves forced to give more consideration to potential upsides.

Surprise, surprise

The global economy is entering March on a gloomier note. Deteriorating data has pushed the Citi global surprise index to its lowest level since 2013, with manufacturing figures from Europe, Asia and the US the latest culprits. There were a couple of rays of light at the end of last week, too, in the shape of an alternative Chinese manufacturing measure and German retail sales. But these remain relatively isolated datapoints. 

The question is what comes next: in retrospect, 2013 hardly proved an alarming period for the global economy.

With central bankers back to maintaining a watching brief, ‘March madness’ might be limited to political not economic developments. Progress (or otherwise) on US-China trade talks and yes, Brexit are likely to be the biggest short-term catalysts for change, whatever the surprise index says.

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