Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs. We know you're bombarded with information, so each day we'll be sifting through the mass to bring you what you need to know, backed up by exclusive data and research.
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Line of best fit
If markets are at an inflection point this year, so too are DFMs' own businesses: the boom driven by advisers outsourcing investments has peaked, meaning new client acquisition is harder to come by.
There are other routes to growth, and one obvious way forward has been in the income space: the pension freedoms have made decumulation strategies even more attractive than they once were.
That, in turn, may now have led to a shift in the way advisers work with discretionaries, according to Defaqto's latest DFM satisfaction study. As the chart below shows, the survey revealed a spike in the percentage of adviser investment business sitting in wealth firms’ bespoke portfolios – from 20 per cent in 2017 to 31 per cent a year on.
The firm doesn't have full confidence in the data: it describes the finding as "curious" and similar to the "little suspicious" 2017 rise in advisory business that duly faded away this year.
Nonetheless, it ponders whether advisers' greater confidence in DFMs - satisfaction levels have risen almost across the board this year - has prompted the increase.
There may also be another reason: the decumulation age may is producing a preference for bespoke offerings. Defaqto says:
It is also likely that decumulation investment pots could be larger, and the complexity of changing lifestyle as you get older may make these pots suitable for bespoke management.
Wealth firms can't relax just yet. Despite this nascent shift to higher-margin business, the survey found that they still struggle to meet adviser expectations in many areas - largely because said expectations are rising at least as fast as satisfaction levels.
So how exactly DFMs meet adviser demands when it comes to retirement portfolios will come into sharper focus very soon. The FCA on Tuesday noted a lack of innovation on the retirement income front. But the success of these offerings will more likely boil down to an old-fashioned mixture: fund selection and asset allocation.
US success stories
As US indices continue to scale new heights, wealth managers are starting to think even more carefully about how they take exposure to the world’s largest equity market.
This is in part an inevitable reaction to soaring valuations. But it also underlines some of the issues playing out behind the headlines of record-high index levels. Market performance is still being driven by a relatively small band of shares: as of a month ago, just one in 10 stocks were at 12-month highs compared with one in four at the start of January.
And individual sectors continue to oscillate. Financials, after combining a late-2018 slump with a tough start to this year, have rallied again in recent weeks to post their best month since November 2016.
This kind of bifurcation means fund selectors are still finding a different sort of opportunity in the US. Despite a general unwillingness to take the plunge on smart beta, our fund selection database does show a few are dipping their toe in when it comes to US equities. The most obvious example remains value ETFs, but there are others: taking dedicated exposure to sectors like healthcare, for instance.
The sheer scope of the US market means there are plenty of targeted active fund choices around, too. Again, this often means targeting particular sectors. But equally relevant is the number of stocks being held by some of these portfolios.
The Artisan Thematic Equity fund, for example - recently added to Waverton’s models, and focusing on areas like tech and communications - has 33 holdings. Loomis Sayles US Equity Leaders, now the fourth most popular active US equity fund in our database, has 35. As the bull market goes on and on, many DFMs think more concentrated funds will give themselves the best chance of continued outperformance.
Last month the IMF and World Bank became the latest organisations to start exploring, or at least understanding, exactly how blockchain could help financial services in the coming years.
The hype around distributed ledger technology, to give it its less glamorous name, has shown little sign of slowing down despite the cryptocurrency slump seen last year. Much of this remains talk rather than action, though Calastone's decision to shift fund trade processing to blockchain last December is a sign that concrete steps are now being taken.
But the technology's ultimate value to asset managers, wealth managers and others may lie elsewhere. Tech departments which have long struggled to secure funding are finding the B-word opens doors more readily. Strategic ambiguity as to blockchain’s actual role in these often-necessary upgrades is proving helpful in getting management to listen, and getting projects off the ground. A simple, if slightly disingenuous, short cut that could help ensure firms’ back-office systems are fit for the digital age.