Marks out of 10

A lot can be learned from the number of funds DFMs are happy to hold, though simplification comes with its own pros and cons. Drill down further and it's a little more straightforward: wealth firms tend to favour fund managers who run concentrated portfolios - or so they say.

That makes sense, because the number of holdings in a fund, and the concentration of its assets, can have a major impact on returns. 

To test whether this sentiment is borne out by reality, we've analysed fund options across four equity asset classes. The chart shows three averages for each region: one for all funds held by DFMs in our database, one for the 10 most popular funds, and the wider sector average.

It's immediately apparent that discretionaries do tend to favour more concentrated portfolios. In three of the four regions, the most popular funds with wealth managers are even more concentrated than those only used by a handful. This consistent focus is one potential reason why DFM picks have tended to outperform peers.

Why does this trend break down in the US? This is more to do with individual favourites than anything else: Merian North American Equity's systematic approach, for example, brings the average down.

But that doesn't wholly explain the discrepancy. The use of heavily diversified US funds might underline selectors' unease at tech stocks' dominance in recent years - and emphasise their attempts to guard against a fresh downturn.

A hidden reversal

As the serene mood in markets continues into March, it’d be easy to think 2019 has been defined by little more than the return of risk-on sentiment. But while some of the fears that surfaced at the end of 2018 have started to evaporate, market moves haven’t been quite as straightforward as these developments imply.

As SocGen points out, the general upwards trend masks the fact that February was somewhat different from January. Value led the way in the opening weeks of the year, but that rebound faded last month in favour of a familiar theme.

Here’s the bank’s Andrew Lapthorne:

Monthly price reversal strategies...were again high up the performance table in Europe and Japan in February, which as the name implies means January's ‘winners' were the relative underperformers in February. Stocks perceived as offering higher growth and stronger profitability were favoured, while value stocks underperformed after a strong January. Our Quality Income index, for example, rose by 4.1 per cent in February versus just 1.4 per cent for our ‘Brave' value index.

The same shifts can be observed in the UK, though relative returns aren’t quite as distinct: the MSCI UK Value Weighted index marginally outperformed its UK Quality Tilt counterpart in January, only for that to reverse last month. 

In short, this seems like another indication that investors are still anxious about this rebound. As a result, they’ve fallen back on a familiar strategy - buying the quality names that served them so well in the previous decade.

That’s not necessarily a bad thing. The nervousness that underlies this preference didn’t prevent triple-digit returns from being racked up over the past decade. But 10 years later, calling the turn from quality growth to value looks as difficult as ever. We’ll explore the topic in more detail tomorrow.

Mind the gap

A week of rather dubious landmarks continues, after yesterday’s decade-of-low rates commemoration, with a pensions watershed today.

March 6 marks the first time in almost a century that retirees become eligible for the state pension after their 65th birthday  - the beginning of a shift to a state pension age of 66 by 2020, with more increases to follow after that.

As the SPA rises, so too have initiatives encouraging individuals to save more themselves - whether that be via auto-enrolment or private pensions.

But while that’s theoretically good news for wealth managers, it shouldn’t be forgotten that a large number of these savers will never have enough to be eligible for such services. Wealth firms should give thought to whether automated services, or basic model portfolios, can help bridge the gap more effectively than they do now.