Balancing act

Product ranges may be expanding, but income portfolios are the most important specialism for DFMs and their ilk - and they can do more than just provide a good yield for investors.

For a start, many income model portfolios have the same risk rating as a classic Balanced offering. That means they're theoretically suitable for a pretty big chunk of DFM clients. And yet their contrasting priorities can produce allocations that are markedly different.

The chart below compares income and balanced models with the same risk ratings (as measured by Distribution Technology's Dynamic Planner), and picks out some of the biggest changes discretionaries tend to make when calibrating their portfolios for yield.

Generally speaking, yield-focused portfolios tend to have slightly less in equities and a higher allocation to bonds. Behavioural biases may be at play here: 'income' still feels like it should mean 'prudence', even when risk ratings are the same. As a result, these portfolios often load up on exposure to steady, if unspectacular, credit funds. 

There are more significant changes on the equity side. The tendency for domestic stocks to offer more yield than other mainstream assets means DFMs' weighting to UK equities, already pretty elevated, moves higher still.

And income portfolios have also taken a shine to global equity strategies. It's another sign that yield-minded funds with a bigger investment universe and less obvious dividend risk are pulling in a crowd.

Most significant of all are the US weightings: many income strategies have ditched the world's biggest equity market entirely, dragging down the average in the chart above.

That's understandable, given the relatively limited yield on offer there. But it also creates an allocation opportunity for managers, or clients, who feel US stocks have run too far. For those who want to maintain their risk appetite but seek a more diversified equity exposure, income portfolios might just be the answer.

European opportunities

Alexander Darwall's decision to step back from his open-ended funds at Jupiter has given wealth managers something else to ponder at the start of Q2. So too has the arrival of Mark Nichols from Columbia Threadneedle as his replacement.

Our fund selection database shows Jupiter European and Threadneedle European Select are, respectively, the second and fifth most popular European equity funds with DFMs. The data also bears out claims that the pair have relatively similar styles: just one discretionary holds both strategies in their portfolios, suggesting wealth managers are conscious of the need to avoid doubling up.

The need for immediate action on holders' part isn't as pressing as it might have been. The continued presence of lead manager David Dudding on the Threadneedle fund should limit problems at that end. Mr Darwall is not leaving Jupiter, either. That looks like sensible succession planning.

Owners of the Jupiter European Opportunities trust, which is not being handed over, will also look forward to getting Mr Darwall's undivided attention in future.

But there is one potential difference between the Jupiter manager and Mr Nichols that's worth considering. The former's performance has taken a knock this year due to a large holding in Wirecard, the payments processing company that's the subject of an ongoing FT investigation. 

The company, long a target for short-sellers, clearly divides opinion. And Threadneedle's European funds are not among its current backers.

If Mr Nichols is a critic he may find that selling down the asset manager's sizeable stake at a reasonable price is easier said than done. Equally, starting that process may reassure fund selectors who are conscious of the German firm's struggling share price. Either way, deciding whether to stay or to sell will be the first big decision for the new manager.

No fee, no win

There are a couple of big reasons why the zero-fee ETFs that have captured the attention of the US market are unlikely to arrive on these shores. As Lyxor's Adam Laird points out, more limited economies of scale play a major part. So too does the fact that stock lending is frowned upon here much more than it is across the Atlantic.

Given those two barriers, it's reasonable to think the passive 'price war' has reached its limits in the UK. Ongoing charges of 0.04 per cent don't leave much room for manoeuvre - or space for new entrants. 

Self-indexing is still one potential solution: firms create their own benchmarks, thereby avoiding licensing fees and helping lower costs. Those with large resources but little established presence in the ETF market, such as Franklin Templeton and JP Morgan, have already started down this route for recent smart beta launches. 

But for now, there's still a comfort factor when it comes to traditional equity indices. If charges are to go any lower in the UK, investors and providers will have to be prepared for even mainstream passives to start tracking slightly different baskets of stocks.