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Bespoke portfolios under pressure, DFMs avoid three-year itch

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Ordering out

It may feel like longer but it's now more than nine years clear since the implementation of the RDR regulation. Given the extent to which it prompted advisers to outsource their investment function to DFMs, does that mean we have reached "peak outsourcing"?

Fortunately for DFMs, there are suggestions that outsourcing has actually further to go.

Defaqto's latest DFM satisfaction study, based on research conducted in late 2021, suggests intermediaries are continuing to hand investment responsibilities to third parties. But, as our chart shows, there's a snag.

The trend of intermediaries moving away from the advisory route and turning to DFMs is continuing, with a notable benefit for model portfolio service offerings. But a catch is that bespoke portfolios – a more lucrative service for discretionaries to provide – have given up some ground.

There's a suggestion that, as far as mindsets go, we are not as far from the early RDR days as many would have you believe. Defaqto suggests advisers may not be directing clients towards bespoke offerings out of a fear that DFMs could effectively take their clients, or at least offer a better service.

But the study also offers plenty of alternative explanations, from client circumstances lacking the complexity to justify the bespoke treatment, to some intermediaries still running an advisory investment service.

With Defaqo predicting that bespoke use should remain steady or even tick up, next year’s results could offer a clearer view of whether we are looking at signal or noise.

Elsewhere, the study again points to stiff competition for assets, even if outsourcing continues. While the biggest names still dominate on the bespoke front, the MPS direct space is "more crowded", with no single name dominating.

For now it’s Brooks Macdonald, Rathbones and Psigma sitting at the head of the table.

Early doors

The idea that allocators can only buy a fund with a three-year track record and £100mn or more in assets is most likely much older than the RDR. But certain developments may force a new way of thinking.

Over in the US, research firm CFRA has pointed to the fact investors are "not sitting on the sidelines" waiting for a three-year track record - at least when it comes to backing ETFs.

The firm’s Todd Rosenbluth notes that as of this month there are more than 850 such products launched since the start of 2020. In total, that cohort accounted for some $121bn in assets.

The firm argues the acceptance of younger ETFs relates to the sheer level of disclosure they are required to provide in contrast to other funds. Simplicity may also explain a more relaxed attitude if some products simply track a niche market.

Yet this raises another important question. We've previously noted that investors have turned to global funds in search of sector and thematic plays. Similarly, some DFMs are moving to a thematic approach over the traditional allocation by geography and sector.

This matters when it comes to fund selection. Many thematic funds are more niche affairs, and any investor runs the risk of piling into a hot trend just as it peaks. DFMs looking to back a nascent sector may therefore have very little time, and certainly not three years, for such a portfolio to make its best gains.

With the situation in flux, the rules of engagement may be due an overhaul.

Clouds and linings

From the usual cries of a fixed income "bubble" to an influx of short-dated bond funds, we’ve seen plenty of evidence that investors worry gilts will finally fall apart.

Government bonds have tended to confound the doubters, and a new challenge for 2022 that can provoke plausible arguments in either direction.

TwentyFour Asset Management points to a new conundrum for sovereign bonds. They note that on the one hand, the increased risk of a recession favours a move back to bonds as a classic safe haven. And yet inflation remains a problem which could well push central banks into taking significant measures.

Oddly, it seems we may be in a more encouraging environment for bondholders than we were a few months ago, when the asset class seemed set for a painful time amid an environment of inflation and rising rates.

Once again bonds – and the classic 60/40 portfolio – could triumph despite the odds.

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