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Bigger DFMs gear up for structural change; Wealth firms lose faith in the classics

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Structural change

Professional fund selectors’ increased use of segregated mandates has been spoken about for several years now, yet things still seem relatively calm on the surface. It’s 18 months since Brewin Dolphin transferred most of its model portfolio holdings to seg mandate structures, but this kind of wholesale change is still the exception rather than the norm among DFMs.

But just because others aren’t shouting about it doesn’t mean nothing is happening. New data published earlier this month shows that more than a third of the best-known discretionary firms do now use the mandates in one form or another. Eleven of the 31 firms surveyed by Money Management this summer said they use such structures in their core portfolios. 

When concerns about bond market liquidity first flared up around the start of the current decade, some wealth firms started looking at segregated mandates as a way of side-stepping potential illiquidity issues. Those worries have returned to the fore this year, but there’s no longer the sense that specialised structures are required in these cases alone. 

Just one respondent to the survey said they used seg mandates for fixed income alone. Equity positions are now just as likely to be structured in the same way. Given the greater control that these wrappers provide for wealth managers, that’s of little surprise. The ability to fine-tune an underlying portfolio is a useful tool whatever the asset class.

However, barriers to entry remain pretty high: the 11 users are among the larger names in the wealth management space. Flexing muscles in this way is still a struggle for those who have fewer assets at their command.

Second thoughts

August’s fund flow estimates suggest UK investors are starting to reconsider their longstanding fund selection preferences. Alongside the usual names topping the redemptions chart, like Gars and those funds whose managers have recently departed, a different dynamic was also at play. Many fund buyers’ erstwhile favourites have started to slip down the popularity charts. 

None suffered particularly dramatic outflows, but several strategies did see redemptions spike for the first time in a long while.

Artemis Income shed an estimated £150m, its worst outflow in three years. Janus Henderson UK Absolute Return lost almost £120m, according to FE - its worst redemptions since the turn of 2019.

The BNY Mellon Income fund shed around £90m, the highest amount since 2016. That's perhaps in keeping with a trend that’s seen DFMs pare back Asian equity funds rather than emerging market portfolios this summer.

There was also another sign that attitudes to Lindsell Train UK Equity may be turning. The fund shed around £170m in July and August - its first outflows of note in more than a decade.

In all these cases, however, holders are cutting back on winners rather than giving up on poor performers. Both the Artemis and the BNY Mellon funds have outperformed this year and last, Lindsell Train remains firmly top quartile, while Janus Henderson’s fund has continued to deliver pretty smooth returns. 

Discretionaries themselves, as we reported back in the spring, are more likely to sell a fund when it’s top quartile rather than bottom. The sight of others doing so suggests the same logic is now being applied more widely as nervousness over elevated valuations starts to grow.

Double plus good

Like any binary active/passive debate, the argument about whether ethical approaches hurt returns sounds fairly redundant by now. Beyond that, the ethical investment crowd might have notched up another small victory.

An Interactive Investor analysis of how funds and their ethical counterparts compare in performance terms found that in five of six cases the latter produced better returns over three years.

There’s no denying this is a small sample, but it might give some investors pause for thought. That said, our database indicates DFMs still need some convincing.

In the case of Rathbone Ethical Bond, this fund is actually held more widely than its conventional peer. But the results are less encouraging elsewhere.

Stewart Investors Asia Pacific Leaders remains hugely popular among wealth managers, while just one firm backs the sustainable counterpart. A similar dynamic applies to Unicorn’s UK equity income range: the main fund has a sizeable following, with not a single DFM backing the ethical version.

For the rest of the sample, DFMs have not even reached an either/or stage of decision-making. In the case of 7IM Sustainable Balance, Kames Ethical Corporate Bond and Sarasin Responsible Global Equity, neither the ethical nor the standard offering appears in our MPS tracker.

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