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

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Itchy feet

When returns are good, clients are often happy to overlook the occasional issue they may have with wealth managers’ service. In tougher times, those flaws get thrust into the spotlight – particularly in a marketplace where competition is as fierce as ever.

Defaqto’s latest DFM satisfaction survey shows there was no room for complacency even prior to this year’s sudden reversal of fortunes. The results are based on the opinions of discretionaries’ adviser clients last summer. And while overall scorecards were generally pretty positive, the shape of the market was already starting to change.

The DFM market has long been typified by, in Defaqto’s words, “a handful of dominant firms but with a very long tail”. The evidence of 2019 suggests that tail is now lengthening, rather than this being another story of the big getting bigger. A growing number of smaller discretionaries are starting to establish themselves: the number of firms used by more than two per cent of survey respondents has risen from 28 to 33.

The qualities that a smaller firm offers to adviser clients – from a less commoditised service to a more idiosyncratic fund buy list – were evidently beginning to make more of an impression last year.

The exact nature of the offerings that advisers look for from discretionaries changed little compared with 2018, as the chart below shows. But there remains a degree of frustration among advisers with what they deem the most important service aspect – the quality of DFMs’ investment staff. Firms are still failing to meet expectations on this front, according to Defaqto.

 

A crisis like the current one is often when businesses prove their worth to clients. Equally, it’s also an occasion when allocators can find clients have had enough of their shortcomings. Wealth managers are under more pressure than ever to deliver – and later this month we’ll examine just how well they managed to navigate a dramatic first quarter.

Writing on the wall

Some statistics can date quicker than others. Satisfaction ratings from last summer still have plenty of applicability to DFMs’ current situation. February fund sales figures, by contrast, already look like relics from a bygone era.

That said, while the FTSE 100 was still trading above 7,000 for most of the month, the final week did serve as a harbinger for what was to come. And so it may prove with some of the data released by the Investment Association last week.

As we discussed last month, there were signs that UK retail and wholesale investors didn’t redeem in droves during the market chaos that ensued in March. But there’s a difference between holding nerves and buying dips, and it’s unlikely that last month’s sales figures, in sum, will indicate much of the latter.

February’s data suggests as such: both equity and bond funds saw small net redemptions, with overall figures spared only by the resilience of mixed asset strategies. Appropriately enough, the Volatility Managed sector posted a record month, taking in a net £888m. Demand for tracker funds also continued to hold up despite the struggles of equity funds as an asset class. And DFMs again saw net redemptions from their direct services, in contrast to the net inflows enjoyed by both advisers and fund platforms.

The hope for active allocators, however, remains the responsible investments grouping. These funds took in a record £735m in February. If interest can be sustained during the current downturn, that will only solidify its reputation as the future of active investing.

Deal with it

The IA statistics were also notable for showing little in the way of redemptions from UK physical property funds: just £28m in February. Clearly, history shows that sentiment can turn very quickly on illiquid portfolios – quicker than their managers can respond to, at least. But in this case it looks like more evidence that redemptions weren’t the catalyst for the latest round of suspensions.

Valuers instead pointed to material uncertainty over valuations. Understandably so, given many commercial property owners are finding their tenants are either going bust or have no obvious revenue streams for the foreseeable future.

From allocators' point of view, what’s most significant from this state of affairs is that it’s not just the daily dealing funds that are having to suspend as a result. Those with monthly or quarterly redemption terms are also falling foul. That suggests a solution to the ongoing problems with physical property fund structures won’t be found in tweaking dealing terms.