Wealth managers' success puts pressure on smaller funds; Lessons from a tough September

Sizing up

Discretionary fund managers, like others in the retail investment world, are continuing to benefit from growing demand for their services. That means their investable assets are on the rise, too – and this ultimately places harsher limits on their fund selection freedoms.

The consensus nowadays is that it’s very difficult for a wealth manager to invest in a strategy with less than £100m in assets. Figures from our own fund selection database suggest the threshold could be higher still.

Of the 300 plus open-ended active funds held by one or more discretionary manager, just one sits below the £100m mark. And this strategy, BNY Mellon US Equity Income, is no absolute minnow at £98m in size.

But the bar is rising all the time. Extend the analysis further – to include strategies held by just a single wealth manager - and it suggests the constraints placed on DFMs are stricter still.

In the equity fund universe alone, there are more than 400 active open-ended funds used in wealth portfolios. Of these, just 15 are under the £100m mark, and it’s not as if there are many sitting just above this threshold either.

A further seven funds are £100-£149m in size, and an additional four rank in the £150-£199m mark.

That means 84 per cent of all active equity funds used in portfolios are now larger than £200m.

This is partly a reflection of the rise in assets across the industry. Average fund sizes are rising all the time, particularly as asset managers get better at closing or merging away sub-scale strategies.

The trend has more than one consequence. We’ve spoken before about fund houses’ eagerness to launch sustainable funds. That’s largely a reflection of demand, but it helps that fund buyers have more freedom of action on this front, too.

Wealth managers’ ESG portfolios, which for all the talk still tend to run much less money than their mainstream peers, have much more flexibility to seed new launches nowadays. That's a big benefit at a time when it's never been harder to launch a conventional active fund.

Diversity lessons

Last month’s market travails have again resurrected concerns over the 60/40 portfolio. The FT notes that the typical US strategy of this nature lost 3.5 per cent last month – the largest fall since March 2020.

Few wealth portfolios are constructed along those lines nowadays: the 40 per cent in particular is now distributed across a variety of different asset classes and sub-sectors. But there are no easy answers here: in months where equities and bonds go down together, wealth portfolios struggle as well.

Early Arc estimates, for instance, suggest that private client portfolios lost between 1.4 and 1.7 per cent on the month.

That’s considerably better than the 3.5 per cent datapoint mentioned above, but the narrow range of returns on offer hints at a separate issue.

The 1.7 per cent figure represents the equity risk index, while the 1.4 per cent drop is for the cautious benchmark.

This relatively minor gap suggests cautious portfolios’ greater share of diversifying assets didn’t protect them too much. As it stands, private client indices of all varieties remain well in the black for 2021. But September’s performance will give plenty of food for thought when it comes to prepping portfolios for the months ahead.

Role reversal

The renewed appetite for Japanese equities we mentioned a couple of times last month has struggled to survive its first contact with political reality.

Far from ushering in another investor-friendly era, new prime minister Fumio Kishida has indicated that a capital gains tax increase might be on the table. Japanese shares have given up almost all their post-Suga gains as a result.

For most wealth managers, this will be confirmation enough that forecasting the future for the country’s stock market remains as difficult as ever. With Japanese institutions of all stripes less eager to provide a helping hand to investors nowadays, the country will remain on the backburner for most allocators.