Indirect effects

While DFMs' rush to direct investing hasn't been as quick as some expected, the ability to remove a layer of fund fees still has plenty going for it in the cost-conscious Mifid II era. And some advocates believe it's having other consequences beyond costs and charges.

Rathbones multi-asset manager David Coombs notes that his team’s equity exposure has increased since it starting buying individual securities, rather than funds, back in 2015.

The idea is straightforward enough: being able to buy specific stocks means discretionaries can take a more granular approach to risk assets, and more easily load up on exactly what they want in portfolios:

Equity exposure has gone up since we went direct. You can now be much more precise than when we used funds.

To see whether this shift holds more widely, we've compared the average equity exposure of a Balanced portfolio that buys individual shares with allocations in other wealth managers' collectives-only models.

The results, as of the end of Q1, show that those selectors that invest directly had 58 per cent in equities, on average. By comparison, the aggregate figure for the other firms in our database came to 56.5 per cent. So there's little evidence (for now) that DFMs as a whole are ramping up their equity allocations by going direct.

Given the relative similarities, the results also suggest most wealth managers aren't finding collectives to be too much of a blunt instrument. But as DFMs' internal resources continue to increase, the case for making better use of existing internal stock-picking abilities will be on the rise, too. Providing, that is, that platforms make it easier for discretionaries to offer this kind of service to clients.

The rule of ten

Events of the past fortnight have put a renewed focus on open-ended funds’ own equity positions - and more to the point, the rules governing what they can and can’t hold. 

The 10 per cent unlisted asset limit has attracted plenty of criticism in light of Woodford IM’s struggle to meet redemptions. But it’s a different 10 per cent Ucits rule that’s begun to cause strains elsewhere in the industry. In an age of concentrated portfolios, the requirement for funds to hold no more than a tenth of their assets in a single stock is starting to hinder some strategies. 

Nick Train noted last week that he was “periodically” having to sell shares in his top three stocks to keep them below the 10 per cent cap. A day later, Morningstar downgraded BlackRock Gold & General in part because of its enforced underweight in the likes of Newmont and Barrick Gold, which between them make up almost 40 per cent in the FTSE Gold Mines Index.

Concentration like this is more apparent in funds benchmarked against sector-specific indices - particularly when those benchmarks have rallied for several years now. The most obvious example is tech; Microsoft, Apple and Amazon all account for above or around 10 per cent of the Nasdaq 100 these days. 

The sheer size of the wider US market means mainstream US equity strategies have it easier - none of the above companies makes up more than 4 per cent of the S&P 500 as it stands. 

That doesn’t mean there are no issues at all facing fund selectors on this front. In the domestic market, Mr Train is something of an outlier - but only because it’s income funds, not growth strategies, that tend to be pushing against the Ucits limit. For those DFMs happy to take this kind of concentration risk, it might be worth looking again at structures not bound by these rules: investment trusts.

Going global

This week’s Federal Reserve meeting should provide investors with their biggest hint yet that the central bank is now prepared to ease policy this year. 

Recent data has suggested the US economy isn’t necessarily slowing, however. Friday’s retail sales figures showed a healthy enough 0.5 per cent monthly rise in May, with April’s figures also revised higher. Factor in the bumper March increase already reported, and it’s clear why the data prompted some analysts to raise growth forecasts for the second half of 2019.

The bear case is that these remain isolated data points for now, particularly when viewed from a global perspective. The Citi global economic surprise index remains stuck in negative territory - and has now been below zero for the longest period on record. It’s these global issues, as much as domestic ones, that could yet define its policy path for the rest of the year.