Holding the fort

DFMs tend to run relatively concentrated portfolios, but the nature of collective investment means things aren’t as simple as they look. Just as a portfolio’s underlying funds can amplify overall asset weightings, they also dictate how concentrated or diversified it really is.

To consider this issue in more detail, we’ve examined discretionaries’ 10 favourite funds in each of the major equity asset classes to see where concentration is most apparent. The results are as follows:

A preference for managers that double down on their favourite positions is apparent: specifically for funds with 50 or so holdings. But there is the odd discrepancy in the data.

Managers in more volatile haunts such as Asia and emerging markets will tend to diversify more, and DFMs’ top picks are no exception. EM equity favourites nonetheless stand out: when it comes to the average number of holdings here, there’s little difference between DFM favourites and the wider sector.

In the Europe and the US, a popular fund typically comes in at around the 50 holdings mark. In the latter case, selectors may be caught between two poles a little. They're conscious of the risks of relying too heavily on the Faangs, but not wanting to diversify away too significantly either.

In the UK, there’s one particular renegade in the top 10: Majedie UK Equity, a fund whose 150 holdings skews the average quite significantly. Its continued popularity means Japan, as it stands, is the sector in which DFM fund favourites are the most concentrated. And given wealth managers already tend to huddle round a few funds in this space, this concentration suggests fund selectors should be examining correlations closely.

Mixed messages

By now, DFMs will have got used to the disconnect between market movements and fund flows. Rising returns have not been accompanied by money pouring into risk assets this year. 

Latest figures from the Investment Association further highlight this trend; March saw UK retail funds notch up their sixth consecutive month of outflows. Yes, those redemptions have eased off in 2019 as serenity has returned, but there are some alarms still ringing.

That’s because it’s seemingly not just single-asset strategies that are now struggling. With the Isa season at its height, March saw mixed-asset funds suffer their first collective outflow for more than two years. That was largely a result of a net £300m exiting the Mixed Investment 20-60% Shares sector - the first time in several years that such funds have seen withdrawals.

Multi-asset funds that lie outside this group also wilted. The Volatility Managed sector, part of the ‘other’ category, recorded its first net redemptions since the creation of the sector two years ago.

There are reasons to be cheerful. Both these sectors have suffered due to isolated incidents rather than a widespread downturn in sentiment. And those funds that have seen withdrawals are largely at the lower end of the risk scale, according to Morningstar data estimates. That suggests investors are taking some encouragement from the returns of recent months and adjusting expectations accordingly.

The downside of this trend for DFMs is that it means their main rivals are still motoring along, as asset allocation giants like Vanguard’s LifeStrategy range continue to rake in the cash.

But here too the trend is towards greater risk-taking: the provider’s 80% Equity strategy notched up its highest inflows on record in March. Green shoots, of a sort, for those wealth managers who think a rising tide would again help lift all boats in the coming months.

Quant quandary

Quant funds are another area notching up some negative headlines when it comes to investor interest. And here, too, the narrative is a once-popular asset class falling from favour.

Institutional outflows from quant funds hit their highest level in two years in the first quarter, according to eVestment figures cited by FTfm. The catalyst has been performance struggles; last year’s slump and the sudden risk-on shift seen this year have not been kind to the strategies. 

As we reported last month, DFMs’ favourite systematic strategies have had problems of their own lately. Still, it’s hard to see the current woes as anything other than a blip.

 Fully fledged quant hedge funds may be shutting up shop, but the retrenchment of mainstream asset management still translating into a shift towards computer-driven processes rather than away from them. This isn’t about trend-following strategies as much as an acknowledgement of what tech can bring to the table. Wealth managers may soon note that for every set of redemptions, there’s another asset manager replacing managers with machines.