Asset AllocatorJul 9 2019

Big names go as DFMs condense portfolios; Wealth firms' bold US picks start to prosper

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Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs. We know you're bombarded with information, so each day we'll be sifting through the mass to bring you what you need to know, backed up by exclusive data and research. 

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Thinning crowds

As we noted last week, DFMs have increasingly been adapting to changing circumstances by making fund selection calls rather than asset allocation decisions.

For some this has simply meant using fewer funds – with high-profile names dropping out of portfolios as a result. Cazenove Capital, for instance, has sold Richard Buxton’s Merian UK Alpha fund from its models. Here's MPS manager Steven Rooke:

We still really like him as a manager but we wanted to consolidate. We topped up Polar Capital UK Value Opportunities – we like the domestic exposure and the multi-cap approach.

A shift from four UK equity funds to three is part of an attempt to more easily monitor how styles blend with one another. Similar thinking saw Cazenove sell Jupiter European Special Situations and up exposure to BlackRock European Dynamic.

EQ Investors has also consolidated its positions: a negative view of Japanese equities saw the team drop Man GLG CoreAlpha in favour of consolidating its holding in Baillie Gifford Japan. That’s also a call on style, according to the firm's Kasim Zafar:

We do think the risk of Japanese financials is increasing, given our negative view on the Japanese economy.

Manager moves continue to influence decisions. EQ has also sold Majedie UK Income and Fidelity Strategic Bond, and the firm is also keeping a close eye on Jupiter European and European Opportunities – both current holdings.

Thesis, meanwhile, has moved away from contrarian funds tilted towards value in favour of strategies with a greater focus on income: it added both Franklin UK Equity Income and M&G North American Dividend towards the end of the quarter. It's also among those wealth firms paring back equity exposure in light of a growing number of headwinds for the global economy. As those risks increase, a tricky period awaits for allocators.

Notching up a win

One scorecard for the first half of the year doesn’t make for particularly pleasant reading for active managers: Bank of America Merrill Lynch data finds just four in 10 US funds beat their benchmarks. But for DFMs the picture is much rosier. 

Baml’s data pins the underwhelming performance on the June rally. Coming after a tougher May, it seemingly wrongfooted managers: just three in ten beat the Russell 1000 index. As a result, the proportion ahead of the benchmark for the first half of the year stood at 41 per cent, having come in at 47 per cent as of the end of May.

Surveys like these rarely stray beyond US equity fund performance - and as a result they’re naturally skewed to a US audience. And UK-based investors looking to the world’s biggest equity market have done rather better so far this year - or wealth managers have, at least.

An analysis of the IA North America sector shows 48 per cent of the active funds contained therein have beaten the Russell 1000 so far this year. Boil that down to DFMs’ own US equity picks and the proportion of winners truly stands out. Some 85 per cent of discretionaries’ active US fund selections have outstripped the index in the first six months of the year.

With one or two heavyweights coming off the boil, there are also signs that wealth managers’ search for more nuanced US exposure is paying off. Their selections that sit outside the IA sector have done particularly well. Even the likes of Vulcan Value Equity - which, as the name suggests, is far from the kind of growth play that has flourished over the past decade - has beaten the Russell 1000 so far this year. 

Results of this kind will reassure discretionaries at a time when performance is under more pressure than ever before. But one sector doesn’t make a summer: later this month we’ll be examining whether DFMs’ other bets have been similarly successful at the halfway stage of the year.

Cracks appear

Years after adviser outsourcing to a DFM took off, a report from the Personal Finance Society and consultancy Diminimis suggests issues with the “agent as client” model are still common across the industry.

One unnamed discretionary firm, having acknowledged during a case study that it was not applying rules correctly, has now realised “many of their supporting advisers are not operating with the legal authority of ‘agent’ when supporting their MPS solution” - in contrary to all parties’ assumptions. That could open up potential liabilities on a number of fronts. 

Allocators themselves are often one step removed from the intricacies of the adviser-DFM relationship. But as the guide states, there are also related issues about investment suitability - depending on whether or not the DFM is deemed to be dealing with a ‘professional’ client. Viewed through this lens, applying closer scrutiny to the structure of such relationships may raise as many questions as it answers.