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Grounds shift under DFM bespoke requirements; Aggressive plays show signs of calm

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The absolute minimum

In an industry beset by growing margin pressure, a simple truth is that professional investors need more assets to make it work commercially. From fund sizes to DFM assets, quantity matters even more than it once did. But a separate development in the wealth space could push things the other way.

Earlier this year we noted signs that the complexities of decumulation had driven some clients from models into bespoke offerings. Now Brewin Dolphin’s head of strategic partnerships tells FTAdviser this could spell a change in the kind of client seeking the bespoke treatment, from those with £500,000 or more to others lighter in assets:

He said more recently clients with smaller pots were seeking to have the capital managed on a discretionary basis, as they believe it’s difficult to obtain a steady income stream from a model portfolio.

Costs being what they are, many DFMs might feel less than happy about accepting fewer assets for bespoke services. But others, keen to establish a foothold in the income space, might feel different.

When it comes to minimum investment requirements for bespoke, Money Management’s latest annual survey of the DFM industry can shed some light. And it seems wealth firms are moving in different directions.

It’s fair to say that of those appearing in both 2018 and 2019’s survey, many have held firm. Nearly 70 per cent have not changed their minimum investment requirement. But 13 per cent have lowered the amount required, with 18 per cent raising it.

It’s an issue that will likely continue to divide DFMs. But with the fight for assets growing fiercer, it could well set out some of the industry's winners and losers.

Higher ground

Another clear battleground for DFMs is performance. But as we’ve discussed, this can even apply internally: wealth firms who run passive-heavy portfolios are seeing a clear dividing line between how these and more conventional offerings have held up in the last year.

It’s a dynamic that applies to both Balanced and Defensive models. For a fuller sense of what’s going on across the risk spectrum we’ve now turned to Adventurous strategies, or those with a Distribution Technology risk rating of 7. A snapshot of performance to the end of August is below:

Once again, portfolios with a preference for passive vehicles have taken the lead. In this case it’s no surprise: the high equity exposure common in portfolios higher up the spectrum will have paid off amid the substantial rally for risk assets. Active funds often struggle to stay ahead of markets in these conditions.

What’s more interesting is the limited range of outcomes on display. Even if this is a small sample, there hasn’t been much deviation between higher-risk active portfolios and those tracking market movements. Active portfolios might have generally lagged, but not by so much.

It’s another contrast with returns from the Defensive set. Cautious investors might hope for a slow and steady approach but the aggressive rally in safe haven assets has meant a big divergence in how different strategies perform. In a time of big returns and bigger headwinds, picking an appropriate diversifier looks trickier than any call on risk assets.

Across the way

From client retention to fees, DFMs would do well to keep an eye on what their peers are doing to keep ahead of the curve. But it also remains important to remember what’s happening in the space adjacent to them.

Enter news from the multi-asset price war. While Vanguard LifeStrategy is going nowhere, others have been busy attempting to muscle in on this space, as per BlackRock’s recent MyMap launch.

There are also signs that other recent entrants to the space have been chipping away at the market. BMO, for one, has taken on £300m in its “low-cost active” range in a couple of years.

Given the sums sitting in the LifeStrategy funds, it’s unlikely Vanguard will be shaken from its perch just yet. But further developments will only up the temperature in this space. And for DFMs looking to succeed in the model portfolio space – active or passive – it’s something to take seriously.

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