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DFMs go direct as peers spread their bets; Equities remain investors' last best hope

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Structural shifts

Wealth portfolios have managed to ride out the pandemic in pretty good shape, but buy and hold hasn't been the only strategy at play.

Over the past 18 months we’ve documented a number of shifts as the likes of value funds and inflation plays return to prominence. These, of course, are cyclical calls: the right fund for the right moment in the cycle -  or so holders hope. 

Yet there have also been some structural changes: the widespread introduction of ESG funds into mainstream portfolios, to take the prime example. Some would argue the increased appetite for thematic or specialist funds also represents a permanent shift in investor mindsets. 

Other changes are less obvious. One that we’ve been charting for some time now is the growing number of funds held in the typical balanced portfolio. This figure’s been rising fairly consistently for at least a couple of years. As of this summer, our analysis shows the typical moderate model portfolio is now home to 25 funds, up from 22 back in 2019.

That makes intuitive sense: as markets continue to rise, buyers don’t want all their eggs in one basket. The same philosophy applies to investment styles: an approach that incorporates both growth and value funds does hint at the need for more underlying managers.

One other trend has also started to reassert itself of late. The first half of 2021 has seen a couple more DFMs join the select group of discretionaries who pick domestic stocks themselves within their model portfolios. 

When it comes to UK equities, these buyers have done away with collectives and are buying shares directly. That takes time and resource. But at a time when valuations are elevated, it also provides the ability to finetune exposures much more precisely.


Look at broader investment trends and preferences aren’t hard to discern. Bank of America says its private clients are now holding some 65 per cent of their portfolios in equities, on average – a new all-time high. Bonds, by contrast, account for less than 18 per cent – a new all-time low.

That’s not to say these clients are entirely euphoric: a sizeable 10.7 per cent is held in cash. But statistics like these do underline why retail money continues to pour into equities at the moment.

This is very much the ‘there is no alternative’ philosophy writ large. Retail investors, like many of their professional peers, are understandably wary of government bonds, and seem to have little appetite for mainstream corporate debt either.

It’s clear that alternatives are struggling to find favour, too, with just 6 per cent of those portfolios held in something other than equities, bonds or cash on average.

That’s not just a retail investor issue. Look at the typical DFM portfolio, and many look broadly the same. A little more in bonds, a little more in alternatives and a little less in cash, but even so there are plenty of discretionaries holding 60 per cent plus in shares at the moment. Some may have jitters, but while the music keeps playing investors of all stripes will keep dancing.


Creeping crypto


Brevan Howard said earlier this year it would explore cryptocurrency investments, and now the firm is moving ahead with that aim: it’s hired a blockchain business founder to spearhead its push into the space.

As the FT reports, the hedge fund isn’t the only financial services firm to have gone down this route in recent months.  Inevitably, hedge funds are at the forefront of this push. But mainstream fund managers aren’t too far behind: there’s considerable interest among asset managers in how exactly they can tap into the crypto craze.

The final frontier remains inclusion in professional client portfolios, and it’s here that the biggest question marks remain. Those tasked with running that money will likely be happy for Bitcoin et al to stay as ‘side hustles’ rather than a wealth manager’s direct responsibility.

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