Knock on Woodford

There's never a good time for the country's highest-profile fund manager to suspend their flagship strategy. But the gating of Woodford Equity Income comes at a particularly inopportune moment for the retail investment industry.

Already battling against month after month of fund outflows, the sector is now contending with signs of a renewed downturn in risk assets and global economic performance. Yesterday afternoon's news will be a further dent to UK investor confidence.

Mr Woodford was once known as a manager who prospered when the going got tough, and while there was a flicker of hope that this history might repeat itself in December, May's events showed otherwise: the fund fell 9 per cent last month. The unquoted holdings have attracted attention, but large-cap blow ups kept coming, too: the firm's position in construction group Kier fell 40 per cent yesterday.

One silver lining to these clouds is that there will be little indirect impact for DFMs. Of the several hundred model portfolios tracked by our database, not a single one still held Woodford Equity Income as of April. 

Wealth managers were heavily criticised during the 2016 property fund gatings for their role in precipitating the closures. When it comes to Woodford, a long, drawn-out slump means it's D2C and institutional investors in the spotlight this time. They're the ones left in the fund, and some are big competitors for DFMs: Hargreaves Lansdown faces some tough questions, as will St James's Place - though its segregated mandate structure gives it slightly more wiggle room.

Still, discretionaries will have little time for schadenfreude given the possible repercussions. The near-term risk of contagion for other active managers is easy to exaggerate, but the reputational damage could linger across all parts of the industry for a long time to come.

Cracks start to show

With all this going on and the bull market into its second decade, it's hard to conceive of a natural audience for aggressive portfolios at the moment. But the lure of higher returns means DFMs will always have to cater to those with a sizeable risk appetite - and making those bigger bets can have an outsized effect on performance.

Investors might also assume that, because of the bigger ups and downs possible in risk assets, higher-octane portfolio returns will show a greater dispersion than their more cautious equivalents.

Yet that's not always the case: the chart below, showing performance in the year to end-March for models with a Dynamic Planner rating of 7, looks pretty similar in scope to that detailing Balanced portfolio performance.

Nonetheless, at first glance the chart appears relatively welcome: around half of our sample returned at least 5 per cent, and only one portfolio lost money despite the hindrance of the Q4 sell-off. But when industry benchmarks are included, the outcome looks less encouraging for wealth firms.

As with portfolios further down the risk scale, Adventurous models lag a WMA index that has a substantial correlation to equities. But what’s different here is the majority of portfolios have also fallen behind Arc’s less gung-ho index, suggesting our cohort of DFMs - which includes all of the biggest names in the industry - have done worse than peers.

As is the case for Defensive portfolios, many firms have opted for other measures when it comes to relative performance. The benchmarks picked by those in our sample range from inflation-plus targets to the Investment Association’s Flexible Investment sector average, with only a few picking Arc or WMA’s indices. That will make explaining recent performance straightforward enough - though some DFMs might wonder if their aggressive approach could be delivering more.

Short supply

Another silver lining for DFMs this morning: government bonds aren’t the only safe haven asset to have pulled their weight amid the choppier markets of recent times.

Gold prices hit a two-month high yesterday – a symptom of both market unease and expectations of looser US monetary policy. Though with soft past performance and the risk of shifting circumstances prominent in the minds of some skeptics, there’s no assumption professional investors will come rushing back in.

However gold prices move in future, the recent comeback reminds us of how binary plays on specialist assets can often be. It’s a problem that has proved make-or-break in other niche areas: as we’ve noted, DFMs can struggle to find any active providers left in beaten-up areas such as resources.

Recent developments show the issue has not gone away: the news that Artemis will relinquish management of its Global Energy fund as an alternative to a closure or merger is just one example of a supply side issue for selectors.