Red lines

Wealth managers are aware as anyone that asset allocation is ultimately only a means to an end. It’s returns that really matter, and in the Mifid II era performance is coming under more scrutiny than ever before. That’s the theory, at least: proving it may be a trickier task. 

Listed firms’ trading updates will provide the first indication of whether underwhelming 2018 performance, coupled with newly comprehensive fee disclosures, have led clients to pack their bags. In truth, ending such a relationship is a big step that most private clients are unwilling to take, even if their returns were in the red last year.

The biggest risk may come from advisers who have outsourced their own investment decisions to DFMs. Clearly, intermediaries should already be aware of the charges they’re paying and what they're getting in return. But an inability to outperform in the bad times will make them think twice - particularly as most, unlike private clients, already tend to use more than one discretionary.

And there has been a growing amount of muttering from advisers in recent months. They note some wealth managers’ returns have failed to match up to the likes of Vanguard’s LifeStrategy range - and are now questioning their decision to outsource. 

Discretionaries might point to mitigating circumstances of sorts: their attempts to avoid conventional fixed income holdings have often done more harm than good. The traditional 60/40 portfolio has worked pretty well in recent years as bonds continued to confound the doubters. The LifeStrategy funds’ long-duration tilt may look risky, but it's paid off in the short-term.

Other questions also remain up for debate. Our own research has shown that DFMs’ fund picks tend to do better than the norm, but until now we’ve not looked at how those selections have translated into underlying performance. 

Discretionaries already benchmark themselves against the likes of ARC, of course, though even these routes have their limitations. Clients’ ability to investigate who’s outperforming whom remains similarly piecemeal at best. So we’ll be examining our own databases in the coming weeks in order to draw a closer line between asset allocation, fund selection and performance. 

Brand power

Fund selectors might profess to be brand-agnostic when it comes to fund selection, but it’s inevitable that a handful of providers fare better than others. Yesterday we got a sense of which providers are most favoured by fund selectors across Europe, in the form of Broadridge’s Fund Brand 50 report.

Unsurprisingly, it’s the biggest fund houses that sit at the top of the tree. But there are some notable contrasts with the firms that are most popular among UK DFMs: little sign here of boutiques muscling in, for one thing. We’ve assessed the biggest European brands by their presence in our MPS tracker below.

The chart, which lists the most popular brands from Broadridge’s report in descending order, supports a conclusion we drew in December: UK DFMs may search far and wide for good managers, but they’re generally still giving short shrift to some of the biggest names on the continent. So for the likes of Amundi, DWS, Robeco and Pictet there’s still a way to go.

Conversely, established UK names have managed to turn heads among European fund buyers. Fidelity, one of the most popular providers from our MPS tracker when it comes to traditional asset classes, is prominent in Broadridge’s list.

The chart above only includes active fund selections; Fidelity and BlackRock’s market share would be much larger were trackers and ETFs taken into account. As it stands, its Schroders which does the best job of straddling the UK and continental European divide, likely due to its wide-ranging product range and popularity in a few specific areas.

A table turns

The boot is now on the other foot for Peter Hargreaves. Having shaken up the UK distribution landscape over the past 20 years, he’s now backing Blue Whale Capital’s global equity fund offering - but professes himself “surprised” at the firm’s struggle to establish itself.

In fairness, Blue Whale has made a stronger start than many might have expected. The Growth strategy was the UK’s best performing global equity fund last year, and has now passed £100m in assets - though at least £25m of that amount came from the HL founder himself.

DFMs are among those yet to take the plunge: the fund isn’t held by a single model portfolio range in our database. That underlines the validity of Mr Hargreaves’ point about the consequences of advice firm consolidation.

It’s arguably advisers, rather than DFMs, who are small and nimble enough to be the early advocates for new strategies. Remove this part of the market and the funds universe becomes increasingly homogenised - ultimately to the detriment of all concerned.