Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.
Forwarded this email? Sign up here.
With asset prices where they are, income can be as hard to find as reliable diversification. But it remains just as popular among investors as yields dwindle, presenting a challenge for the many DFMs running dedicated portfolios here.
The gains made last year may well mean the divide between the yield generated from Income portfolios and that thrown off by Balanced strategies seems less obvious than in our 2019 analysis. We’ve run the numbers once more to test this theory, with the results shown below:
As we noted last year, some may wish to reassess their income approach: for several firms the yield gap between the two types of model remains pretty slim, and in one case there is no difference at all.
But on the face of it there’s a familiar – and more reassuring - picture. Income portfolios continue to hold up well in aggregate, yielding an average 3.3 per cent versus 2 per cent from a Balanced offering. The average Income strategy yields around the same as it did in our last analysis, and the biggest yield gap between an Income and Balanced portfolio has only grown larger.
At a time of collapsing yields, how are income strategies holding up so well? One explanation may lie further up the risk curve: a focus on equity income could mean higher yields are still feasible, albeit with greater risks. And if equity gains push yields down for Income names, this also affects the Balanced strategies in our sample.
If Brexit outcomes remain up in the air, DFMs might at least feel slightly more comfortable with domestic shares than they did a year ago. What’s less likely is that the majority will significantly load up on exposure: with many maintaining a structural bias to the area already, shifts should come via fund calls rather than big allocation moves.
But after a year of promising signs for both value investors and domestic-facing stocks, many have stuck by their top holdings. The chart below notes the 10 most popular UK growth names in our MPS tracker a year on from our last analysis.
Many DFM favourites appear difficult to shift. A spate of recent buying into the top four names has helped matters, even if their standing with the sector has shifted slightly. The Liontrust and Lindsell Train funds both sit slightly lower as a proportion of the sector – most likely a result of DFMs buying other funds, too – while Investec’s sector share has nudged up.
But DFMs aren't exactly throwing everything behind reliable growth names: Man GLG Undervalued Assets remains a favourite pick while other value-minded funds have come to the fore in an unloved market now showing some potential. Polar Capital UK Value Opportunities has greater standing than it did in our last assessment, while Jupiter UK Special Situations now makes an appearance in the top 10.
What’s notable is how difficult some of the mainstays are to dislodge, even as the prospect of a market reshuffle edges closer. With DFMs running a long tail of additional UK growth funds, the real action may well be taking place at the margins.
Down the road
Two weeks into a new decade, a reminder that life still isn’t getting any easier for robo advice firms. One such business, Moola, will close its doors at the end of February, FTAdviser reports.
It’s almost a common sight by now: Investec decided to call time on its Click and Invest business last year, while losses here and elsewhere in the sector are well known.
For now, it’s difficult to see rapid improvements. Businesses in this space will likely need staying power - and deep pockets - to endure until their approach can pay off. At that stage, they become more attractive targets to typical investment firms looking for assets.
For DFMs, it reiterates where the real competition lies: multi-asset fund providers, other wealth firms and advisers. But difficulties in the robo space make it trickier to see, in the long run, where exactly new clients might be coming from.