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Asset Allocator

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DFMs rotate while playing it safe; Immaturity issues loom larger for allocators

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Wealth managers accused of playing it safe when it comes to their underlying fund picks might well ask why not, given all the risks looming over investment markets of late.

There are other reasons to stay the course, too: for all this uncertainty, the dominant trends of recent years have yet to truly change, as we discussed last week. So it’s no surprise that buy lists have remained relatively rigid in recent times.

But this caution doesn’t mean DFMs have simply been frozen in their tracks. Plenty of discretionaries are still rotating their selections when necessary, even in model portfolios.

To illustrate that fact, we’ve analysed our fund selection database to show how many DFMs have made at least one fund change in a given asset class over the past year. The results are below:

On average, then, roughly one in two wealth managers has changed or tweaked their approaches since last summer in the six categories analysed.

It's not all action, though. The absence of UK equity income overhauls shows how entrenched attitudes can be in the sector. That’s not surprising, given the pool of quality names from which wealth managers can pick. And despite outflows having picked up following the gating of Woodford Equity Income, that episode hasn’t sparked any fundamental reassessment when it comes to dividend strategies.

Change is more noticeable in other asset classes. The proportion of DFMs switching their emerging market equity fund choices is in part a function of asset allocation changes: boosting or cutting exposure is more likely to mean managers come and go.

By the same token, however, the sector in which overhauls are most common - strategic bond funds - is a different case entirely. Just one in seven changes here is a result of a material shift in asset allocation. And these switches aren't simply down to the big bond rally of recent months, either: more than half the changes took place in 2018, rather than 2019. It’s clear discretionaries are still doing some hard thinking about exactly which strat bond fund best suits their needs.

Short lived

Survivorship bias is a common hurdle encountered by fund buyers. And it’s worth noting that survivorship rates themselves aren’t always that high. Figures from S&P Dow Jones Indices, cited by FTfm this morning, show that fewer than half of UK equity funds open at the start of 2009 are still in existence. European and global equity funds display similar longevity rates. 

Previous research on the subject has shown that even investment trusts suffer from comparable issues. Fund selectors will also consider longevity from the perspective of managers themselves, particularly now there are so many funds being run by those who have no experience of the financial crisis.

But less attention is paid to the age of the stock market itself. Data from SocGen sheds some light on this side of things. The bank notes that the proportion of stocks with less than 10 years of price history has risen sharply over the past six or seven years. 

That’s to be expected during a bull market - and many of these firms are maturer businesses that are only now going public. What’s more, these companies still form a small part of the overall universe: such businesses still only account for around 13 per cent of all shares, and less than 10 per cent of the total market cap of a typical global benchmark.

Still, there are reasons to be wary of such trends, not least when assessing investment styles. SocGen’s Andrew Lapthorne sums it up as follows:

Growth stocks, which we often refer to as simply stocks too young to have experienced a recession, can also hide previously unseen downside. Indeed, during the TMT bubble there were many cyclicals masquerading as growth stocks and today there is a long list of (sometimes very large) companies that were not around during the last recession. Their sensitivity to an economic downturn is then often unknown.

Long road for Recovery

Longevity, of course, is no guarantee of success. Just look at M&G Recovery, one of the very oldest funds in the UK investment universe. Its brief resurgence in 2016 is now a distant memory, and it’s back in the bottom UK All Companies decile over five years. 

Discretionaries won’t need reminding that this is a distinct case of an out-of-favour investment style - and nor will they be unfamiliar with the question of when value will again start to outperform growth.

Recovery has returned to the headlines because of Hargreaves Lansdown’s refusal to give up hope. Wealth managers have long since done so: not a single fund buyer tracked by our databases still holds the fund. In this case they can hardly be accused of short-term thinking - whatever the future may bring for value stocks.

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