Reaching up

Investors have been perfectly happy to reach for yield over the past decade, but when it comes to bonds there's some reticence to do likewise among DFMs. Despite many being content to add equity income strategies to their most adventurous portfolios, the racier parts of the bond market - like high-yield and emerging market debt - don't tend to find as much favour.

This is partly because some discretionaries look to strategic bond funds instead - many of which will have hefty allocations to high-yield in particular. They're also buying more esoteric fixed income offerings.

All that said, there are some dedicated HY and EMD strategies that are still in vogue. The most popular, ranked as a proportion of all wealth firm fund selections in these two asset classes, are below:

High yield products (just) outnumber EMD funds when it comes to those with a decent following, but there's a variety of approaches on show. They range from floating rate note exposure to both a short duration fund and a local currency sovereign bond tracker in the EMD space.

As that indicates, DFMs are particularly picky when it comes to EMD. Some providers, like Barings and Neuberger Berman, are popular in these areas but don't have a single strategy that stands out. Instead, discretionaries' picks are spread across a range of hard and soft currency offerings.

Some are still settling for more of a catch-all approach: top pick M&G Emerging Markets Bond invests in both credit and government bonds while also combining US and local currency exposure.

And as was the case at the start of the year, the EM funds tend to throw off more cash than they once did. Both the M&G fund and L&G's passive offering yield more than 6 per cent. The highest stated yield elsewhere is the Pimco fund's 5.3 per cent, while the other high yield strategies pay less than 4.5 per cent. Years of strong performance have started to take their toll on junk bond returns - and many DFMs have already moved on.

From hunter to hunted

The wariness with which discretionary managers were once viewed by financial advisers has faded away in recent years. Scepticism over fees and service quality may remain, but concerns that outsourcing to a DFM risked advisers being circumvented and clients being ‘stolen’ have proven unfounded.

And there are signs the boot is on the other foot nowadays. Some advisers are taking on discretionary permissions themselves - and it’s not just investment where things are beginning to change.

Per Mark Polson’s latest column for Money Management, the gap between the two sectors is starting to close as advisers get up to speed on issues like direct equity portfolios, cash management and multi-jurisdictional business. He writes:

I think the top end of the wealth space isn’t going anywhere; it’s not addressable for advisers. If you could address it you’d turn into a wealth manager or family office. But further down the scale, wealth managers deal with lots of clients with assets in the low millions. I am going to guess that there is probably £200bn to £300bn available in that space. 

That is absolutely fair game if advisers want to go at it – but they will need to close some of those gaps and look at some of the solutions the wealth managers use in order to accommodate specific needs.

Mr Polson’s theory is that it will prove easier for advisers to improve in these areas, whether in-house or via partnerships, than for wealth managers to make financial planning a core part of their own businesses. In an age of constrained growth rates, that suggests that focusing on existing strengths - like investment management and asset allocation - will become more important than ever for wealth firms.

Charging ahead

One point of difference between advisers and wealth managers is fees - at the very least, the most expensive wealth firms cost more than those at the pricier end of the advice scale.

Mifid II may be starting to change all that. Factor in a period of lower returns and an increasingly competitive marketplace, and it’s not hard to see why almost everyone thinks charges are heading in only one direction.

The temptation is to think things are the same wherever you look. Mifid II may be confined to Europe (as it stands), but tougher markets and low-cost investment offerings are prominent everywhere.

The US Bureau of Labor Statistics, however, thinks otherwise. Its producer price index is one datapoint watched closely by those looking for signs of inflation pick-up in the US economy. The latest edition, released yesterday, did little to suggest core prices are on the rise. But there are exceptions: when it came to services, the BLS said most of the April uptick was due “prices for portfolio management, which jumped 5.3 per cent”. Someone, somewhere, is still finding a way to eke more money out of their customer base.