Red menace

As the year draws to a close, it’s time to check in on how discretionaries’ funds of choice are holding up amid another better-than-expected year for risk assets. 

It’s a familiar story for equities at this point: much fretting over valuations and a potential return of volatility, only for the year to end with double-digit gains in sight once again. For now, the difficult markets of late 2018 remain very much the exception rather than the norm. Most annual statements are going to look more than respectable as a result.

Thinking cynically about their own performance, wealth managers will know it’s much easier for clients to tolerate underperformance when returns are in the black. Nonetheless, selectors will want to know their own active fund choices are still delivering the goods.

For a snapshot of how things have panned out, we’ve assessed the 10 most popular funds in five of the most popular asset classes:

Clearly, relative returns over three years are still holding up pretty well. A sizeable majority of picks are beating peers in the UK and Asia, and six out of ten strat bond funds are doing so, too.

That said, there is a red wave of underperformance in Europe and the US. These figures are against peers, not benchmarks - so in the latter case it’s not so much a case of DFMs struggling to beat the market as struggling to find the right active choices on occasion.

And on a 12-month view, that issue's becoming more significant:

Here, while go-anywhere bond funds picks are still delivering the goods, the red alert on equities has spread to UK and Asian strategies, too. In the UK, that’s partly because of the rally seen in recent months. In Asia, it’s more a case of regional standouts starting to change. One-year figures won’t worry wealth managers unduly, but the chart is an indication that the winners of recent times might not be best placed to flourish in 2020.

Man overboard

On that note, more evidence today of stewards of capital growing tired of underperformance. The Edinburgh Investment Trust has sacked Invesco’s Mark Barnett and handed the £1.3bn mandate to Majedie.

The Invesco man’s underperformance had been going on for more than 12 months, of course. As we’ve previously indicated, discretionaries themselves have long since moved on to new pastures. So the rationale behind this switch looks reasonable enough.

And yet - there’s always a yet. Taking a very short-term view, the move away from Mr Barnett does look a little odd, timing wise.

The general election result, in two days’ time, could well provide a catalyst for his domestic-focused portfolio to rally. Indeed, while the Invesco Income funds’ performance remains relatively subdued, the Edinburgh trust’s relative returns have jumped over the past quarter as markets start to price in a better outlook for domestic equities.

These very points have been made by the board of another Barnett mandate this morning - they're preparing to wait and see, even if it is just a few more days. It all has faint parallels with the fate that befell Barnett’s old mentor Neil Woodford, whose portfolio was shuttered by Link just as its own holdings began to show signs of life.

From trust boards’ perspective, criticism of this kind may appear a little ‘damned if you do, damned if you don’t’. Equally, the words of Nick Train, responding to the same shift in market dynamics, also ring true. Mr Train's returns have started to head in the opposite direction, but he says he “became a better investor once I stopped asking myself these sort of questions” about future performance.

Wealth managers and indeed trust boards, under increasing pressure to justify their existence, unfortunately don’t have the same luxury.

Miffed Mifid

A fifth of fund managers have admitted making Mifid II transaction reporting errors, according to an freedom of information request made by Duff and Phelps and reported by the FT. 

The real figure, taking into account those who either won’t say or don’t realise they’ve done so, must be much higher. Such is life under the new regime of mass-reporting.

These particular rules, designed to help regulators “detect crimes and better understand…trading behaviour”, in the FT’s words, must feel a particularly thankless task for fund firms. That will increase the likelihood of errors or oversights.

Anecdotally, however, there are also still indications that asset managers still aren’t putting in the hard yards when it comes to the disclosure requirements they must make to wealth managers and other buyers. From the retail investment industry’s perspective, that’s the oversight that should be prioritised by providers - and one that stands in the way of clients getting the full picture of what they’re paying for their investments.