All change

An unconvincing rally has spelled stasis for many model portfolios, but that doesn’t mean all DFMs are twiddling their thumbs. When it comes to fund selection and marginal allocation calls, there are those who have had to turn proactive in recent months.

For some, misgivings about alternative fund offerings have led to a reassessment of how to construct portfolios. For MitonOptimal, the decision was forced upon it: a holding in BlackRock’s Multi-Manager Alternative Strategies fund had to be reassigned after the asset manager closed the product.

Deciding that a $185m fund is too small to be viable may ring some alarms for discretionaries who favour niche portfolios. But Miton had more pressing allocation issues to address: the team has since backed Muzinich’s Emerging Markets Short Duration fund as a low volatility option, as well as two convertibles funds – CQS Global Convertible and Polar Capital Global Absolute Return. As the firm's Shaun McDade explains:

The thinking is equity markets continue to have upside, but given the late-cycle stage we want downside protection. The bond floor provides equity-like performance with downside protection.

Elsewhere, manager retirements and departures have forced the issue. Close Brothers' Matthew Stanesby notes the firm has switched out of Fidelity Strategic Bond, Neptune European Opps and Kames' bond funds in recent months. Jason Day, who works on Aberdeen Standard Capital’s Conventional managed portfolio service, says the only recent change came when the retirement of Dean Newman led to a switch from Invesco Global Emerging Markets to the Artemis equivalent.

Things get more notable for Aberdeen Standard on the asset allocation front. The strong performance of EM local currency funds in Q4 led Mr Day’s team to shift some profits into hard currency plays. And in keeping with investors' search for higher-quality fixed income this year, the managers have also been buying on the continent:

We hold European investment grade bonds as well as European high yield. We topped up our weighting to European investment grade, which should do well in a lower for longer environment.

Homeward bound

This time last year, things were supposed to be looking up for domestic equities. Morgan Stanley had just joined a gamut of investment banks predicting better things for UK shares over the coming months. Attractive valuations were supposed to override political uncertainty; buying opportunities were starting to emerge.

Twelve months later and, dividend payouts aside, the FTSE All-Share has gone nowhere. That performance isn’t as bad as some markets', admittedly. All the same, the lack of progress is a fitting tribute to the government’s own attempts at leaving the European Union. 

Fortunately for wealth managers, some just weren’t buying the analyst enthusiasm. A look at our asset allocation database shows that the average allocation to domestic stocks in a typical moderate portfolio crept up by just 0.4 percentage points over the past year.

For all the acknowledgements from DFMs that valuations were at a pretty low ebb, the number of wealth firms reducing allocations was equal to the proportion upping exposures over this period. Caution has abounded: many discretionaries preferred to double down on areas like the US rather than take positive action on the home front.

So come the turn of 2019, when analysts were again touting the merits of UK equities - this time in terms of dividend payouts - wealth firms might have been expected to sit on their hands once again. Not least because those political risks hoved into view ahead of the once-significant March 31 Brexit deadline.

But wealth managers’ focus on income is such that they have been returning to domestic shares in greater numbers this year. Though average allocations still aren’t rising that much, more than a third of discretionaries have started to actively up weightings this year. Fewer than one in ten are cutting positions at this point. Optimism has doubtless been boosted by the wider equity rally, but the income argument has seemingly done enough to convince many wealth managers. Whether its merits can survive through to the end of the year is another question.

Murmurs on the rise

More rumblings on the Mifid II front: specifically more evidence that the disclosures now required might be starting to alter the way adviser clients operate. That’s the explicit finding of a survey from NextWealth, at least: two thirds of the advisers they spoke to said they would seek to change aspects of their business as a result of those disclosures.

Unsurprisingly, those changes typically involve putting pressure on providers. Half of those in the above category - equating to a third of all advisers in the study - said they would put pressure on platforms and fund managers to reduce prices. That cohort is likely to include DFMs, too, given many of those surveyed already outsource their investment decisions.

There’s a difference between saying and doing, clearly: achieving these goals won’t be easy unless those advisers have a decent chunk of money behind them. By the same token, the risk of clients taking that money elsewhere remains a live one for discretionary fund managers.