Asset AllocatorMay 8 2019

Wealth firms' route to more MPS success; How discretionaries are dodging crowded trades

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Something special

As we've discussed in the past, one way for DFMs to pull in new business when organic growth is harder to muster is via specialist offerings. Income-focused portfolios have long had a place in a wealth manager's arsenal, but nowadays demand is clearly on the up for ethical offerings, too, as well as tax-focused strategies.

Whether the competition already has these areas sown up is another matter. And while bespoke portfolios, by definition, have always allowed discretionaries to tailor to specific needs, model portfolios are increasingly broadening out as well. Below are the options offered by a sample of 60 different DFMs:

Income portfolios, then, are already something of a crowded space: some 70 per cent of the DFM firms we assessed offer an income portfolio, if not an entire range focused on yield.

It gets more interesting elsewhere. When it comes to ethical portfolios (or similar), just a third run these in MPS format. That’s in part because every client’s idea of “ethical” will be slightly different – and better suited to bespoke investment. But the fact that many DFMs do now run ethical models suggests a happy medium can be found.

Aim models are much rarer, for similar reasons: issues such as the risk involved mean that many DFMs prefer to only provide this service on a bespoke basis, if at all.

This means that those who run all three in a model portfolio format are an unusual sight. So for most firms, expansion into more niche areas looks to be a sensible option -  provided the necessary scale or renewed attraction of bespoke services doesn't stand in their way.

A different crowd

A new list of crowded trades has highlighted the 10 shares on which global active managers are most reliant at the moment. But the rankings make for relatively pleasant reading for DFMs - because there’s little evidence their own preferred fund managers are leaning heavily in the same direction.

The top 10 list was examined by FT Alphaville yesterday here. Produced by UBS, it’s based on global managers and the MSCI AC World index, and inevitably dominated by US companies as a result. More surprising, perhaps, is the lack of Faangs - only Alphabet makes the cut. 

In response, we've analysed a sample of 24 global and US equity fund favourites to see whether they too are overweight such stocks. There’s not much sign of that: of the 12 global funds analysed, only three featured more than one of these shares in their top 10 positions.

The slightly smaller US universe means there is more concentration among this group, but not to a serious extent. Is there something different about the UK market, or is this simply a reflection of DFMs’ more idiosyncratic fund selection tastes? Perhaps a little of both. 

But there are a handful of wealth manager favourites that do stand out: Rathbone Global Opportunities, which has 9 per cent across four of the top 10; Dodge & Cox US Stock, with 11 per cent across three shares; Loomis Sayles US Equity Leaders, which holds 15.5 per cent in a different trio; and Legg Mason ClearBridge Aggressive, which has 14 per cent in its two largest positions, United Health and Comcast. 

But while Rathbones and Loomis Sayles have risen to the top of their respective sectors in recent months, the other two are lagging. As a crude measure, that suggests little in the way of correlation between performance and the most popular trades.

Poles apart

Closer to home, earnings figures suggest another crowded trade - in relative terms, at least - is still holding its own for now. UK shares may not be flavour of the month at the moment, but far more are prepared to take the plunge on multinationals than they are on domestic-focused businesses.

Figures from the Share Centre’s latest Profit Watch UK report appear to back that up: Q1 profits at the UK’s 40 largest companies rose 11.2 per cent, compared with a steep 17.6 per cent fall for the rest.  

The large-cap figures are flattered slightly by the booming performance for miners and oil majors, but the divide is hard to conceal at this point. And any closing of that gap is likely to come from multinationals faltering rather than smaller firms bouncing back: the Share Centre notes the recent engines of UK profit growth will be "running more slowly” from this point on.