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DFMs fight to defend their record; 2019's big asset class U-turn

Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs. We know you're bombarded with information, so each day we'll be sifting through the mass to bring you what you need to know, backed up by exclusive data and research. 

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Defend your record

With Mifid II disclosure upping the pressure on DFMs to justify their fees, a combination of tricky markets and benchmark quirks have painted some Balanced portfolio returns in an unflattering light.

For many this will mean uncomfortable discussions with clients unused to market falls. But these are unlikely to be the hardest conversations for wealth managers: it’s safe to say those in Balanced portfolios will be more forgiving of bumps in the road than clients further down the risk scale.

For a sense of how DFMs’ more loss-sensitive clients fared, we’ve assessed how the Defensive portfolios in our database – those with a Dynamic Planner risk rating of 3 – fared in the year to the end of Q1. The results are below:

While every portfolio succeeded in avoiding a loss over the period, there’s a good spread of outcomes: five portfolios have returned less than 1 per cent, but three have delivered more than 4 per cent.

As in our last analysis we’ve included the return from two established benchmarks, Arc Cautious and the MSCI WMA Conservative index. In a similar dynamic to that facing Balanced portfolios, quirks of the WMA index place it ahead of all DFMs’ efforts.

Fortunately for the wealth managers concerned, most have opted not to use either of these metrics. Half of the 28 wealth managers in the sample set out benchmarks: most of these are targets versus either CPI or Libor, with a couple gauging performance against the Investment Association’s Mixed Investment 0-35% Shares sector average.

A closer look at these suggests wealth firms tended to at least beat their own metrics: nine of 14 portfolios with stated benchmarks outperformed these. It's a victory of sorts in what has been a difficult year, but time will tell whether it's enough to satisfy clients in the less forgiving Mifid era.

A universal bond

Why back a global bond fund? For DFMs it’s far from top of the list when it comes to fund selection, for various reasons. In part this stems from a reluctance to outsource allocation calls, something we’ve already seen with global equity funds.

But there are exceptions, and even within a small batch of global bond names backed by DFMs there’s a variety of approaches on display. We’ve taken a closer inspection of the most popular names in our database, detailed below:

The presence of three trackers among the top five suggests how many DFMs are approaching this sub-sector: as a form of broad exposure on the fixed income front. However, it's notable that fund selectors are using this cohort more as a sovereign bond play than anything else.

The most popular offering, Vanguard's Global Bond Index fund, does have some exposure to credit but more than half of its assets are tied up in sovereign bonds or similar debt. It's the same for most of the other selections: eight of the 10 names listed above have at least half of their assets dedicated to sovereign debt or similar instruments.

At the same time, global bond funds unsurprisingly share another common trait with their equity equivalents, in a significant weighting to the world's biggest economy. A substantial majority of DFMs' favoured global bond funds have the US as their biggest country weighting. It suggests some DFMs are getting extra Treasury exposure at a time when the debt is back in favour.

Second thoughts

DFMs who pulled back their EM exposure in April are not alone: the latest data shows that investors have been selling out of the asset class at the fastest pace since crisis struck in Turkey and Argentina last year.

The headwinds facing the region are there to see - a ramping up of trade war rhetoric being the most obvious right now. But nearly five months into the year, the pullback could also reflect a simple reassessment of a widely tipped equity play for 2019.

That’s because EM performance is yet to play out notably: year to date the MSCI index for the region lags common benchmarks for US, global, UK and even European equities in sterling terms. It's another win for the bears so far.

For DFMs, throwing in the towel might seem like an unlikely option - but developments in the region might prompt a rethink of how they are positioned. For many, it could simply mean continuing to back defensive managers in the region.

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