Picks versus the pack

As we touched upon yesterday, government bonds are still far from flavour of the month with professional investors. But corporate debt is a different story: whether as a diversification play or the lure of racier returns, DFMs are generally happy to get involved.

And while scepticism in some parts of the bond market lends itself to tactical - and therefore passive - fund selections, active funds have a much larger role to play elsewhere in the fixed income world.

The question, then, is whether those funds are earning their keep. Equally, underperformance might just mean discretionaries are backing a more cautious fund in anticipation of tougher times.

So we've updated our snapshot of bond fund performance, noting how the 10 most popular DFM picks stack up by three-year performance. The results are outlined below: 

Six months on from our last look, and relative performance has worsened slightly for corporate bond favourites. Six out of 10 have underperformed their peers over three years. They include some established names, from Fidelity MoneyBuilder Income to Kames Investment Grade, as well as offerings from the likes of Church House and Pimco.

The picture's brighter elsewhere. When it comes to both high yield and strategic bond, wealth firms have mostly picked winners. For the latter group, relative performance has improved notably since November.

That suggests that wealth firms are largely in safe hands for now. But allocators may wonder how these funds will fare when the corporate bond headwinds do come calling.

The earnings split

Macro factors are still holding sway in equity markets - monetary policy shifts, global growth fears, trade war headlines - but there's still something to be said for fundamentals. Earnings have been a particular pillar of support of late, both in the US and in Europe.

As ever, there's an aspect of managing expectations going on here: beating estimates is always easier once those forecasts have been revised down ahead of time. But while nerves over the corporate outlook remain, the fact is that plenty of companies have been surprising on the upside. With US economic data showing signs of strain, and European economies also under pressure, results couldn't have come at a better time.

It's not unalloyed good news for fund selectors and their charges, however. As Goldman Sachs points out, the fact that "more firms than usual" are beating estimates in the S&P 500 means that those who fail are taking a beating. 

Talk of earnings misses being severely punished has been around for several years - but according to Goldman these stocks' subsequent underperformance is now the worst its been since at least 2006. Rising stock dispersion may be good for active managers, but the risks of being caught on the wrong side are increasing, too.

There's one more area where allocators could find themselves caught out. Europe has also had a better-than-expected earnings season so far. In recent days, that and the trade war headlines have helped erase the gap between European and US equity performance. Not enough evidence yet to start closing those Euro equity underweights, but a sign that the pendulum could yet drift back in the other direction once again.

Stones unturned

Last week we highlighted a group of up-and-coming funds that have thus far been overlooked by investors - discretionaries among them. Another list of under-recognised standouts can be found in the latest issue of Money Management. 

The wealth management sector can't be blamed for not investing in this bunch. The lists have been specifically tailored to financial advisers whose relative lack of scale gives them access to smaller funds. As a result, none of the funds chosen are over £100m in size.

But while that cap rules them out for larger DFMs, smaller discretionaries can still take advantage. A look at our database, however, shows that few have seized that chance. A solitary holding of Jupiter Merlin Conservative is the only evidence that these strategies have found favour with wealth managers. Once again, opportunity knocks for those willing to be a little different.