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Wealth firms go from four to 40 in race to diversify; Boutiques blossom for fund buyers

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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Alternative assets have a place in every discretionary’s portfolio nowadays. How much of a place is still up for debate - and the narrative is becoming more complicated week-by-week

In the short-term, sentiment has turned against the asset class: concerns about physical property funds’ illquidity and absolute return strategies’ performance, coupled with a renewed rally for government bonds, has had a notable impact on fund flows.

But take a step back and all this has done is clouded the overall picture. Decisions to move away from the asset class have been far from unanimous. What’s left is a disperse set of allocations, as detailed in the chart below:

Compare this sample of firms in our database with our previous look at the spread of equity allocations, and the difference is stark. Weightings range from four to 40 per cent, covering pretty much everywhere in between along the way. Nonetheless, there is a degree of bunching around the 10 to 15 per cent mark.

As touched upon, these allocations encompass assets ranging from hedge funds to property, commodities and private equity exposure. That means they aren’t simply viewed as replacements for government bond exposure.

Still, with equity positions in Balanced portfolios largely adhering to the 60 per cent mark, alternatives and bonds are fighting it out for the remaining assets. As it stands, the data indicates bonds are still winning that battle: allocations to credit and sovereign debt are still, on the whole, higher than those dedicated to alternatives. And the past 12 months will have done little to convince DFMs that this is the wrong decision.

Boom, not bust, for boutiques

Boutique asset managers are becoming unnerved by the growing amount of merger and acquisition activity across the investment industry. A policy paper from New City Initiative has called for a “more proportionate approach” to regulation to ensure competition isn’t being stifled by M&A.

The argument is well-rehearsed by now: as the big get bigger, investors are left with fewer options and may ultimately be deprived of their best chance of good returns. Similarly, consolidation among wealth managers and financial advisers means they control ever-larger pools of assets, and struggle to invest in small yet nimble funds.

As it stands, however, there are still myriad choices for fund buyers to pick from. It'll take many more years of concerted dealmaking to filter down the UK funds universe, let along the wider European market from which most discretionaries now select. And while there are barriers to entry for new players, there’s little sign that these are insurmountable given the wave of fund managers setting up on their own of late.

The second point, relating to fund selectors’ buying power, is more of an issue for the asset management industry. Yet big funds do not have to be run by big firms, and vice versa.

In fact, boutiques are just as likely as others to profit from the consolidation of wealth management buy lists: our own research indicates that mid-sized fund firms are, pound for pound, a clear winner from this trend. Times may be tough for some of the very smallest firms who have failed to carve out a niche for themselves, but boutiques as a whole are still on the up.

Hands-free

Exactly how short-term are short-term investors? The answer is slightly different for retail investors than for the professionals. Monitoring portfolios on a daily basis is part and parcel of investment managers’ job, but DIY investors should perhaps resist the urge to keep too close an eye - if only because the temptation to tinker may prove too great.

Some studies do contradict this theory - we reported in March on research suggesting US retail investors are more rational than received wisdom would have it. 

But technology isn’t exactly helping them on this front. Witness TD Ameritrade’s attempt to enable “in-vehicle trading” for its clients. Life on the open road may be a more fundamental part of American existence than it is for commuters in the UK, but chopping and changing shares while checking the sat-nav is, needless to say, a bridge too far. 

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