Regional heavyweights

They might not have qualms about backing the same handful of funds, but DFMs do have eclectic taste when it comes to their providers of choice: our analysis suggests asset managers of all shapes and sizes can still make it into wealth portfolios.

Less apparent is exactly who can muster the most support from DFMs in specific areas. Certain fund firms have become irrevocably associated with given asset classes over the years, but these aren't always the ones that discretionaries are backing. Our chart below breaks out the top three providers in three of the main equity regions, as ranked by how widely their active funds are held in model portfolios.

That shows just how dominant one provider can be in an out-of-favour region. BlackRock’s active offerings make up nearly a fifth of the European fund selections in our tracker. This is a story of two star offerings rather than a broad selection: DFMs do back several BlackRock funds in Europe but it’s just two – European Dynamic and Continental European Income – that have widespread support.

Wealth managers are showing less of a clear preference elsewhere. And as in our previous analysis, boutique names – from Crux to Merian – are punching above their weight.

But it's the thirst for yield that's the most important factor in giving certain providers the edge. Nearly half of the cases where DFMs use BlackRock in Europe come down to the success of its income offering, while JPM tops the list in the US because wealth firms pile into its equity income fund. The theory even applies in the UK equity income space: Schroders appears often because wealth managers are still heavily favouring its Maximiser product, which sells call options to increase payouts, as well as its conventional offering.

The power of three

As attention shifts from policy tightening to policy easing, the alarm bells being rung in relation to BBB-rated debt have started to fade away. Those worried about forced sellers, should the lowest-quality investment grade bonds be downgraded to junk, have had less cause for concern now financial conditions are set to be loosened again.

In theory, at least. Big US investors like Pimco and AllianceBernstein are among those still warning of poorer quality corporate debt. And it’s not just the North American market under scrutiny; a blog post by Bank of England staff last month noted that BBB debt’s share of the sterling IG corporate bond market has risen from 8 per cent to 50 per cent over the past two decades. 

While not an official ‘house view’, the BoE authors expressed the usual concerns about the potential impact were some of this debt to be downgraded.

Set against this are recent attempts to calm the waters from the likes of Fitch, as well as the better-than-expected data that we highlighted ourselves earlier this year.

Our own data has shown that strategic bond funds were happy to let their triple-B positions move higher at the start of the year. With corporate debt rallying again, that’s not proven an unwise choice. But nor has it been the defining decision of the year: IG debt has matched government bonds in performance terms this year, but again lagged high yield. 

As a result, there’s little consistency when it comes to the performance of those strategic bond managers with sizeable BBB positions. For all the talk of the triple-B threat, it’s still the very riskiest debt that is doing most to define manager returns in 2019.

Fee-for-all

As has been widely noted ever since the FCA finalised its asset management market study, economies of scale are pretty thin on the ground in the investment industry - from the customers' perspective, that is. The first major change on that front arrived yesterday, in the form of M&G starting to pass on some of these savings. 

'Major' might be pushing it - the drops equate to a maximum of 0.12 percentage points for funds with £6bn in assets, which unsurprisingly led to suggestions that the firm "could have gone further" - but the acknowledgement that some kind of change is necessary is perhaps the most important thing here. 

That said, there's no guarantee this practice will filter through to the rest of the industry. There are signs elsewhere that a variety of fee shifts, and charging "innovations", might only serve to make fund pricing more complex, and less easily comparable - all for the ultimate benefit of just a handful of basis points. Faced with this kind of shift, fund selectors would do well to remain on their guard.