The funds tasked with diversifying DFM portfolios; A counterweight to pricing pressures

Alternative standouts

After all the talk of how to use alternatives in portfolios, it’s worth considering the most popular strategies with DFMs as it stands.

As per our latest podcast, the nature of those funds tend to spread far and wide: even the likes of absolute return contain a multitude of different offerings.

Still, wealth managers’ favourites do still tend to fall under this banner. The most popular fund in the space remains Janus Henderson Absolute Return, closely followed by JPM Macro Opportunities and BNY Mellon Real Return. Those last two have shown that manager moves don’t have to mean curtains for a fund’s popularity with professional buyers.

Next is a fund that demonstrates the disparate nature of the sector. Fund buyers were relatively slow to be convinced of the merits of absolute return bond funds, but 24 Absolute Return Credit is nowadays the third most favoured alternative strategy of all.

Below this trio sit Neuberger Berman Uncorrelated Strategies, AHFM Defined Returns, and Fortem Capital Progessive Growth – a relative newcomer in many discretionary portfolios.

Then there's Church House Tenax Absolute Return Strategies, which has gradually crept its way up the rankings in recent years. The BH Macro Trust and the MBS-focused Angel Oak Multi-Strategy Income fund complete the list.

Such is the sprawling world of alternatives that this analysis excludes two asset classes typically lumped in with the category. Traditional multi-asset funds are one: the likes of Troy Trojan and Ninety One Diversified Income would otherwise be among the favourite alts picks.

Real assets are another – the popularity of infrastructure and its ilk means real assets are a distinct category of their own nowadays.

And some wealth managers expand this definition further: the likes of Sanlam and Waverton have included the Hipgnosis Songs fund in their dedicated real-asset portfolios in the past. The trust, back in the news today, remains popular with many wealth managers and other investors despite lingering doubts over its strategy.

Pricing power

It’s commonly held that the larger a wealth manager gets, the more likely they are to achieve discounts for clients on fund management fees.

That makes intuitive sense, and has been the case in the past. In the post-commission era, the “super clean” share class deals secured by Hargreaves Lansdown et al in 2013 demonstrated that those with deep pockets can often get exclusive deals.

It doesn’t always pan out that way. The big continue to get bigger in the DFM space – and in the adviser space, too. Yet as it stands, NextWealth notes that larger firms are currently charging clients more on average, including for their investment offerings.

The reason, according to the consultancy, is because consumers remain happy enough to pay a premium for such services.

This isn’t quite a case of price inelastic demand – because adviser clients should be factored in, too. The popularity of the likes of Tatton show that advisers are keen to get good deals when outsourcing investments.

Nor does it mean mean fund fees won’t fall further – adviser demand is large enough to have an impact, and many of the big wealth firms – St James’s Place springs to mind – are able to negotiate good deals while still charging clients premium fees.

But it does emphasise there are barriers to overcome for end-client acquisition. Of course, choppier markets and poorer portfolio performance could yet have an impact on what investors are prepared to pay, and to whom they're prepared to pay it.

Dining out

The idiosyncratic end of the thematic investing world usually focuses on emerging trends and new technologies: artificial intelligence, cybersecurity, and so on. But there are always outliers: Amundi is looking to raise a couple of hundred million for a new cheese, wine and ham fund, according to Bloomberg.

As it happens, the asset manager does have a track record in this space, having previously run a strategy that lent to small Italian food producers.

Fund selectors interested in this new private debt offering will doubtless be keen on extensive due diligence, whether that be on the ground or simply in the comfort of their own homes. That said, those working at the sharper end of the ESG industry may need to spend some time assessing whether meat and dairy can co-exist with SFDR demands. There's always a catch.