Striking a balance

The widespread adoption of risk ratings among model portfolios has obvious benefits – chief among them the aim of producing consistent outcomes for certain types of investors. 

But as we’ve shown before, there are numerous ways to reach a given destination. Today we're thinking in particular of Distribution Technology’s Dynamic Planner tool, widely followed by wealth managers, which provides guideline asset allocations for a given risk level.

And while discretionaries are keen to ensure their models stay in the same risk buckets, these allocations aren't hard and fast rules to which they must adhere. The chart below gives a better sense of where DFMs tend to forge their own path.

Some material differences: the average Balanced model has much less fixed income exposure than the DP allocation midpoint, largely due to lower levels of conventional corporate bond exposure. Alts is another area where DFMs are clearly ploughing their own furrow. That’s not particularly difficult, given property is the only alternative asset included in the DP categories. 

There’s also more than meets the eye on the equity front, where wealth firms tend to be slightly underweight compared with the target exposure. DFMs may be more risk-on than multi-asset rivals, but they’re still more cautious than they have to be on equities.

Allocators have shied away somewhat from the likes of Japanese, Asian and EM exposure, as well as domestic stocks. US weightings are neutral - as we’ve discussed before, this is one area where benchmark risk is real. It's Europe that's the big surprise: plenty of discretionaries have been cutting back exposure to the continent for some time now, but the region remains the only area where they’re ahead of the target allocation.

Untapped opps

Private equity is one asset class that barely features in wealth managers’ MPS allocations - understandably so, given its illiquid nature. But PE has gained more of a foothold in bespoke portfolios, the chief attractions being its diversification benefits, and returns that have long since recovered from their financial crisis lows.

Mainstream fund managers’ own venture into the world of private assets tells us there are many who still see PE, and investments of a similar ilk, as an untapped opportunity. McKinsey, for one, has enough confidence in the sector to proclaim earlier this year that it’s “come of age”.

Two swallows don’t make a summer, but Winterflood has also talked up PE strategies this week: it notes that listed funds’ 2018 results were largely very strong, with little evidence of valuations starting to sag. 

Like McKinsey, it highlights the elevated levels of “dry powder” being held across the industry - and says this could help out with either future growth or downside protection.

The broker concedes there is one big obstacle to further investor interest: the chunky fees still levied by most of these trusts. There’s little sign of this changing in the short-term; Winterflood says that’s “unfortunate” given the sector’s merits. The Mifid II era means providers will surely come under more sustained pressure to cut charges in future. 

For now, there is a brighter side to look on from wealth managers’ point of view: the weaker trusts have fallen by the wayside, while those that survive have strengthened balance sheets yet often still trade on hefty discounts to NAV.

Those discounts are also a result of investors’ refusal to forget just how calamitous the crisis was for PE. McKinsey points to three reasons to be positive in the event of a new downturn: sellers now have more options, funds are now tending to drip-feed investment rather than overegg things or pull it entirely, and co-investment strategies have limited individual risk.

But all three of these pillars could prove shaky if the tide does go out: herd behaviour is hard to withstand. It may take another crisis to truly restore investors’ faith in PE.

Splitting heirs

Asset management’s unhappy fascination with the role of co-chief executive has received another blow this month. RobecoSam, the sustainable investments arm of the Dutch firm, isn’t on the same level as Janus Henderson or Standard Life Aberdeen from UK fund selectors’ perspective. But the outcome of its co-CEO experiment has proved similarly ill-fated. 

In this case, the pair at least displayed their commitment to joint decisions by both quitting at the same time. But this has to be the nail in the coffin for a corporate experiment that had few fans in the first place. The working assumption was that such decisions were made to placate egos, and the reality is that sharing roles often proves as disruptive as taking a tough decision early on. 

Perhaps surprisingly, it’s Standard Life Aberdeen’s efforts that have proven most resilient. Martin Gilbert may have stepped back, but both he and Keith Skeoch are still at the company. But this is a low bar to leap over. Asset managers who opt for similar splits in future will be putting their credibility at risk - with both shareholders and their funds’ investors.