Ample alternatives

Giant funds are on the march again: as we revealed last month, the average equity fund backed by a DFM is now over £1bn in size. But how big are DFMs going when it comes to other asset classes?

We’ve turned our attention to bond fund picks from across our database, while also picking out the 20 alts offerings most widely backed by the discretionaries we track. The results are below:

High yield offerings tend to be on the smaller side, relatively speaking – understandable given their niche appeal and broader liquidity concerns. But on the whole, bond funds held in model portfolios have attained much greater scale than their equity counterparts.

In the corporate bond space, for one, a third of the funds in our sample have at least £2bn in assets. Even when a £14bn behemoth, Pimco’s Global Investment Grade Credit fund, is stripped out, the average size still sits above £1.7bn.

It’s a similar story for the most popular alternatives names, given many DFMs have backed absolute return products of a substantial size.

In keeping with the findings we reported in May, DFMs are still finding plenty of smaller-than-average funds to sit alongside the titans - in the bond space, that is. For alternatives, it's a little different, as the next chart shows:

The data suggests that smaller alternative offerings are thin on the ground. The proportion of sub-£500m picks is lower here than for any of the bond or equity regions we've examined.

Many alternative funds are by nature more flexible than single-asset strategies. Yet the fact remains that wealth managers are increasingly turning to giant strategies to provide greater diversification to their own portfolios. There's a tension there that could yet play out for the worse in the long run.

Sunset

Japan has a demographic problem and so too, increasingly, do Japanese equity fund managers. 

James Salter, head of Polar Capital's Japanese investment team, yesterday became the latest manager in the space to step back from running money. He had spent 18 years at the firm.

Unusually for Polar, its Japan offering wasn't a popular choice with wealth managers according to our database. That stat plays into a wider story: most DFMs are picking from a relatively small pool of fund manager favourites in the region.

And there's been a bit of change to the names in that pool in the last couple of years. Schroders' Andrew Rose is retiring at the end of this month. Baillie Gifford's Sarah Whitley retired last year. 

Of the managers still in situ, Legg Mason's Hideo Shiozumi is 76 this year, while Man GLG's Stephen Harker has successfully fought off retirement rumours for some time now.

The good news for selectors is that Japanese fund succession planning tends to be pretty solid. Mr Harker has a team working with him in York, Baillie Gifford's Matthew Brett had worked on the firm's flagship fund for a decade prior to Ms Whitley's retirement, and our database shows no sign of selectors reacting badly to the departure of Mr Rose. 

Mr Shiozumi's more idiosyncratic style may prove harder to replace, admittedly. But DFMs appear more than content with the next generation of Japan equity standouts now coming to the fore. 

Oil overload

The fluctuating fortunes of the oil price explain a lot about why wealth managers no longer bother too much with commodities funds. Recent falls have pushed the Brent crude price to the verge of a bear market again, a sharp turnaround from the rally seen at the start of the year. 

Unsurprisingly, the latest drop is being pinned on concerns over a global slowdown. But it also highlights the volatility of commodity prices as a whole: reflex risk on/risk off attitudes may have returned to equity markets over the past year, but they never really went away for resources.

Oil prices are a prime example of how quickly attitudes can change. Add in similar patterns for a variety of metals and it's clear that resources managers - and even commodities trackers - have their work cut out. 

At the same time, a longer-term view emphasises that crude prices, for all their short-term bear and bull markets, have effectively been stuck in a trading range for the past four years. It's a similar story for very different commodities such as gold. That suggests that there's little long-term trend to take advantage of at the moment, either.