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By the end of a tumultuous 2020, DFMs were feeling pretty content with their investment efforts. New data indicates adviser clients were pleased, too – and also suggests a healthy future for outsourced portfolios.
Defaqto’s latest annual DFM satisfaction survey was largely conducted during the third quarter of 2020. Risk assets had rallied by that point, the pandemic was briefly in abeyance in the Western world, and advisers were happy enough with their lot.
Two thirds said their preferred DFMs had adapted “very well” to Covid-19 pressures, with just 2.5 per cent feeling no changes at all had taken place. Over 70 per cent said they felt completely supported by their discretionary managers during the pandemic, with a similarly low level of negative responses.
What’s more, overall satisfaction levels “[moved] in the right direction” over the course of the year, according to Defaqto. Adviser expectations continue to increase, but discretionaries are just about keeping pace with those elevated demands.
Most notable of all is what looks like a renewed drive to outsource clients’ investments. After two years of non-existent growth, the proportion of advisers’ investment business outsourced to DFMs on platforms has risen back to the 2017 level of 26 per cent. With direct MPS and bespoke business staying constant, the shift has come at the expense of advisory portfolios – which now account for just a quarter of client assets.
Of that quarter, a growing proportion is being held in multi-asset funds – 68 per cent, up from 62 per cent the previous year. As Defaqto puts it, this essentially “underlines the strength of the outsourcing argument”.
So the pie is, perhaps, starting to increase in size again. But competition is arguably fiercer than ever. Of advisers' 15 favourite DFMs, only Brewin Dolphin saw a material uptick in usage last year. The long tail of discretionary players continues to grow, even as consolidation continues across the industry. And with adviser expectations still on the rise – inevitably, ‘online facilities’ was the category with the largest gap between expectations and reality last year – the struggle for client assets is only going to get fiercer.
DFMs’ ability to provide a range of investment options continues to grow in importance for adviser clients, according to the Defaqto survey: it now ranks second only to quality of investment personnel when it comes to key attributes. As valuations get stretched and client preferences become more particular, allocators are having to think harder about how to deliver the goods.
One key point on this front, as we discussed earlier in the month, is the production of income. With portfolio yields dipping, distributing even moderate amounts is becoming ever more challenging. But there’s little sign yet that recent travails have prompted a change in outlook.
Back in the summer of 2019, we examined how DFMs’ higher income strategies compared with their standard income offerings. The results showed that they tended to rely on equity income to boost payouts, rather than alternative assets or something similar.
We’ve now run those numbers again, and the results are comparable in 2021. Equities make up the exact same proportion of higher income portfolios – 51 per cent, on average – as they did in 2019.
The chart above compares current income and high income portfolios, but it's worth looking again at allocations from 18 months ago. Because there are some differences in construction: the typical UK weighting has dropped back, particularly in higher income offerings where the average position is three percentage points lower than it once was. Other regional allocations have also dropped back, with global offerings the beneficiary.
But on the whole, attitudes are much as they once were. Alternative income options - even the likes of real assets, which as we reported last week are seeing an increase in interest - remain a very small part of such offerings. And fixed income funds have actually grown in importance for conventional income portfolios: they now account for 48 per cent of positions, up from 43 per cent in mid-2019. The rise of specialist bond strategies largely accounts for that increase. For now, these remain the main area where wealth managers are happy to go off the beaten track for income.
For wealth managers, the main benefit of fund firms’ inaugural value assessments has been a few basis points being trimmed off certain funds’ headline charges – although the funds in question have tended to be underperforming mandates, and in some instances professional selectors will have received preferential pricing in any case.
For many retail investors, there’s been a much larger benefit. Fitz Partners notes today that investors in 600 different funds have been moved out of legacy share classes as a result of the assessments. On average, those retail holders have seen fees cut in half. There may be a perception that fund firms have used these exercises to simply tinker round the edges of their fund ranges. But this data alone indicates that the processes enforced by the FCA have already proven thoroughly worthwhile for many end-investors.