Trading in

Now trade war jitters have rattled markets once more, DFMs might again be considering how their US and Asia allocations stand. The nature of these positions could split the winners from losers in a year where, until now, the prevailing direction has been up.

But the trade war isn’t just a US/Asia headwind. It might also prove another piece of bad news for a region that's already pretty unloved: Europe.

As UBS analysts observed in a note last week, those European names that look vulnerable – from carmakers to mining and consumer goods companies - had yet to claw back Q4 losses even prior to last week's nerves:

Stocks that our analysts expect to be most negatively impacted by trade wars have re-rated relatively to the market year to date but still stand 15 per cent below the previous peak.

When it comes to DFMs’ favourite stockpickers, things are a little more complicated. Below are wealth firms’ top European equity picks and their China exposure as a proportion of stock revenues.

So while discretionaries can be reassured that the typical European fund doesn't have that much exposure to China, their favourites are mostly ahead of the average, according to Morningstar data. That's the case for both BlackRock European Dynamic and Jupiter European, the top growth picks in the space.

Unsurprisingly perhaps, income funds tend to be a little more insulated. BlackRock's fund is a case in point, while Invesco European Equity Income and Schroder European Alpha Income, which aren't included in the chart, derive only four per cent of revenues from China.

Still, the findings might only reinforce DFM reservations about Europe. They also emphasise that the trade war may ultimately bite investors of all kinds. The UK's mining mega-caps, for instance, have been able to shrug off the initial salvos - but investor nervousness could yet change all that.

Enter the specialist

DFMs may increasingly be on the lookout for alternative investment opportunities, but when it comes to equities their tastes are pretty conventional. Take-up of smart beta products is limited, and the perennial mix of regional growth and equity income strategies still holds sway.

As we've discussed before, even small-cap funds struggle to get a look in. And when it comes to specialist active equity funds - in this case defined as those focusing on a specific sector - only the most aggressive DFM portfolios tend to take an interest.

When discretionaries do seek more nuanced exposure in this way, one fund house dominates all others in the popularity stakes. Our MPS tracker shows that Polar Capital accounts for 40 per cent of all specialist equity fund selections - be they actively managed or smart beta. Remove the smart beta strategies and the proportion rises to 50 per cent.

This presence largely boils down to DFMs swarming around just four strategies: technology, insurance, biotechnology and healthcare. It helps that all four remain in vogue with investors - each has outperformed the MSCI World over the past three years, as well as during the more volatile past 12 months.

There's also a compounding effect at work for wealth managers. Polar's status as a trusted provider means DFMs are more likely to stick with the firm when it comes to other strategies run by different teams. The danger is that this comfort turns into complacency: as ever, discretionaries should be wary of what might happen if they rely too heavily on a single business.

Margin call

Even those asset managers finding favour with fund selectors weren't immune to the pressures of 2018 - the slump at the end of the year saw to that. 

Add a greater focus on charges from investors and regulators and it's reasonable to expect major pressure on margins. All the more so for those suffering redemptions.

For now, however, fund firms are still holding the line pretty well. Moody's Investors Service analysed ten businesses across Europe and found just a five per cent drop in management fee income and a one per cent fall in ebitda margins last year.

In many ways that's been the recurring story of recent times. Talk of margin pressure has yet to translate into much pain in the grand scheme of things. The great change stalking the sector has been slower to materialise than some expected.

What's more, the first four months of 2019 has given more ballast to asset managers readying for the next storm. And while defences are being maintained, there's less of a chance they'll seek to overhaul the way in which they do business with fund buyers.