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DFMs' biggest buys and sells
Even in moments of flux DFMs don’t tend to be huge fans of portfolio churn. But whether it’s firms spotting attractive entry points or simply calling time on both winners and losers, many model portfolios remain in a steady state of evolution.
What does this mean for buy lists? It’s something of a drip drip effect, but over time it’s possible to identify those funds subject to higher levels of buying and selling.
For a snapshot of this, we’ve assessed our database to see which funds have been most heavily bought and sold in the last year.
To start with the sales, DFMs have been dropping some names with familiar struggles: many have ditched Invesco GTR, with M&G Optimal Income also falling out of several MPS ranges in our database. The important caveat is that it’s inevitable to see more people selling a fund if it has more owners in the first place.
Some DFMs have been turning away from JOHCM UK Opportunities, whose manager John Wood retired in late 2017. Axa Short Duration US High Yield has also disappeared from a number of ranges.
When it comes to buys, some big names still hold up: Baillie Gifford Japanese and Lindsell Train UK Equity picked up new supporters. DFMs have also continued to buy into Newton Global Income.
Elsewhere, wealth firms have been backing Artemis Strategic Bond, likely due to strong performance versus peers prior to 2018. A lesser known name, Aberforth UK Smaller Companies, has also gained some backers in the last year, though it has struggled versus sector peers.
Liquidity concerns and the need for meaningful conviction are among the most obvious culprits behind this reluctance. A similar phenomenon is that relatively few positions of 2 per cent or lower can be found in the models covered by our MPS tracker, regardless of how big or small the fund in question might be.
Exceptions do exist, but these require specific criteria to be met.
7IM, for one, has a handful of 2 per cent positions in its models, from commodity plays to positions in small-cap funds. But it’s unlikely stakes of this size will ever become the norm: Tony Lawrence, an investment manager at the firm, stresses that these are isolated cases:
Across our active model portfolios the majority of the positions are large, high conviction positions. However, certain tactical asset allocation decisions combined with market movements mean that we also have a handful of smaller positions in our portfolios. These are a minimum of 2 per cent in size.
What does this mean for DFMs? One setback is that, as with small outperforming funds, they are inevitably missing out on some investment opportunities.
On the bright side, a focus on meaningful exposure means wealth firms can better prioritise time and resources. It also raises the prospect of divergent performance in future: if DFMs have differing high conviction positions, returns will differ sharply in the event of another market turn.
As we noted yesterday, gilt exposure is mainly a passive play for the DFMs in our database, though it’s a mixed bag in other sectors. The lower returns on offer do compel more wealth firms to go passive in bonds than equity, but active names still make up a decent proportion of holdings.
In part this is due to the difficulties of tracking what remains an inefficient market. So it’s interesting to see an index provider trying to address this: Morningstar has revamped its indices in an attempt to better reflect the nature – and challenges – of today’s fixed income universe.
The new approach tries to deal with some common bond headaches. Morningstar’s indices will prioritise “larger, more liquid bonds” and have fewer constituents than peers to minimise the cost and difficult of tracking them. The firm will also try to increase transparency on some key exposures, from duration to sector allocation and credit quality.
Whether the changes will persuade more investors into passive bond plays is unknown - but it may give active fans pause for thought.