Alternative experience

If there's one area where new funds have captured wealth managers attention over the past decade, it's alternatives. The need to ensure portfolios are well balanced has led to a fundamental rethink of asset allocation - and meant more esoteric strategies have been welcomed into the fold. 

There is one obvious downside to this fresh thinking, however. We recently discussed just how many equity managers lack the experience of running their funds through a full market cycle. And while an equity offering can at least prove its worth in a bull market, rising asset prices offer precious little indication of how alternative assets might perform when things go wrong.

DFMs’ alts holdings did at least pass muster - to a certain extent - during a rocky Q4. But three months' worth of savvy positioning isn't enough in itself to prove that a product truly can act as a reliable diversifier.

Unfortunately for wealth managers, when it comes to alternatives that have stood the test of time, their options are relatively limited. We've taken our examination of manager track records and applied it to alternative asset classes - and the results make for stark reading.

Of DFMs' favourite managers in the alternatives space - a category that here includes physical property and infrastructure offerings – just 11 per cent ran their fund at the height of the financial crisis.

As with our previous analysis, there may be some fuzziness in the data. And there are other mitigating factors in this case. After all, many popular alts strategies emerged precisely in response to the financial crisis, given all eyes were then turned to the need for capital preservation. 

Few back then thought it would take more than a decade for a new crisis to emerge - in the absence of such events, DFMs should ensure they haven't got complacent in their alternatives positioning in the meantime.

Hello, old friend

The end of the first quarter is in sight and the positivity of recent weeks has yet to disappear. Latest figures from Bank of America Merrill Lynch even suggest the "flowless recovery", as some have termed the opening weeks of 2019, is no longer quite so flow-free. The bank calculates that £10.7bn worth of investor cash went into equities last week, the highest level in a year.

Much of that money has reverted to an old favourite: US equities. Stocks across the pond saw £19bn in inflows last week, according to Baml, again the highest in a year. That was offset by £3.5bn in outflows from Europe, and, more notably, £2.1bn from emerging markets - the largest redemption since last June.

This activity is unmistakably reminiscent of last summer, when US equities' outperformance meant they were virtually the only game in town for some investors.

It's been much the same story for the past few years: the all-conquering S&P has driven returns, while emerging markets in particular have struggled. Europe did at least enjoy a rally in 2016-17, but DFMs aren't the only investors to have lost faith in the value offered by the continent.

And yet 2019 does differ in one important detail. The rebound hasn't been driven by America to the same extent that early-2018 returns were. As it stands, European indices have narrowly outperformed their US counterparts so far this year in local currency terms.

The problem for wealth managers is that the US remains the bellwether of global market activity, even if it isn't always at the front of the pack when it comes to returns. Add to that its outsized status in asset allocation benchmarks, and the career risk to being underweight the country becomes more apparent.

And true enough, there isn't much indication that DFMs are changing their minds at all. Our database shows fewer than one in four wealth managers have lowered their allocations to the region over the past nine months. Difficult decisions may still await the remainder in the coming months.

Not so threatening

In an age dominated by talk of fintech, big tech, and "disruption" in general, it's hard to attend a conference or discussion without hearing how asset and wealth management are sitting ducks for external players. The most popular manifestation of this concern is the idea that Google or Amazon will steal the industry's lunch.

It's not quite scaremongering, but there are still reasons to think this talk is seriously overblown. An industry built on relationships is not as closely linked to Amazon's transactional business model as some may think. And the barriers to entry for such moves remain extremely high, particularly for a player wanting to build scale fast. Add to that the cross-border fragmentation and possible reputational risks, and you can envisage a scenario where tech giants' market presence remains confined to China.

If big tech did put in an appearance, the consequences need not be all bad: a powerful distribution network wouldn't necessarily hurt asset managers, for example. From DFMs' standpoint, a more accessible way of investing would help correct the huge Isa imbalance and perhaps even open doors for wealth managers in future.