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Asset Allocator

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Discretionaries' risk appetite hits new highs; Wealth firms' racier equity income picks

Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.

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High rise

As usual in the post-crisis era, DFMs have had to climb the wall of worry on the way to higher returns over the past year. Importantly, returns have kept materialising in the face of all those risks. That, inevitably, leads to questions over complacency.

Such questions may seem odd at a moment when almost every allocator is keeping an eye out for late-cycle behaviours. At the same time, monetary policy is still very loose and ever-rising equity markets can breed false confidence. To investigate whether DFMs are keeping their feet on the ground, we’ve charted their average equity allocations over the past year (and a bit).

The results are below, but we should note that ‘(bit)’ is important. Comparing allocations at the start of 2020 with those at the turn of last year is a little unfair. Investors had just come off the back of a brutal final quarter of 2018, which meant that they were naturally a little more defensive than they’d otherwise be. So we’ve included average allocations as of the start of Q4 2018, too.

As the chart indicates, the relative serenity of the past year - and the past few months in particular - means equity allocations are now higher than they’ve been for some time. 

The underlying figures tell a similar story. Almost two thirds of the DFMs in our sample are running higher weightings to equity funds than they were at the start of Q4 2018. A third are showing more prudence, and a handful have more or less stuck with the same positions. But the overall picture is one of greater confidence in equities’ resilience. Whether that’s justified at this stage in proceedings remains to be seen.

Yielding ground

Sanlam’s bi-annual Income Study shows relatively little in the way of new developments. Despite the (now quashed) signs of a market rotation that emerged in the second half of last year, most of the equity income funds doing well by its metrics remain the same as in the previous edition.

DFMs’ own preferences, too, continue to fall neatly enough in the right categories. Half of discretionaries’ top ten picks are among the White List of best funds, and half are in the middling Grey List.

As above, we know that wealth managers still have a slight preference, in aggregate, for risk-on behaviour. And there are a couple of indications that their equity income choices follow suit.

The Sanlam study ranks funds not just on performance but on their income-paying qualities, too. The White List, for instance, contains 14 funds that paid an average income of £22.70 on £100 invested over the half-decade to December 31. The Grey List is home to 34 funds but that average payout remains exactly the same.

But for DFMs’ ten favourite funds, as defined by our own database, this average falls to £22.30. Remove the Schroder Income Maximiser outlier and this drops to £21.20. 

It’s a similar story on dividend yield - the average for funds in the White and Grey Lists is 4.7 per cent. Absent Income Maximiser, the typical yield for wealth manager picks is 4.5 per cent. 

These are very small differences, and in the case of yield there’s an argument that DFMs may be avoiding dividend traps. But it may just hint at discretionaries having a preference, at the margin, for growth over income - even when it comes to their dividend-paying strategies.

Value chain

For all our talk of how value assessments might shake-up the industry, the forces of inertia, ie business-as-usual, shouldn’t be underestimated. Hargreaves Lansdown has come under fire this morning for sayings its multi-manager funds - they of the hefty Woodford exposures - have provided value to investors.

A look at other fund firms’ value assessments suggests asset managers remain happy to wave away performance issues and the question of cost when need be. That’s par for the course: if funds are still producing money for the business, a short document produced in-house isn’t going to prompt a major overhaul.

Some assessments might end up looking a little foolish as a result, but they were never going to put all the power back in the hands of the customer. The best that can be hoped is perhaps that they have a marginal impact on both cost and the number of sub-scale underperforming funds out there. We’ll look at the latter issue in more detail next week. 

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