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Will Schroders fund remain in Jupiter's orbit?; What we talk about when we talk about passives

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Cash converters

Income investing has been a particularly trying experience over the past decade, initially because quantitative easing drove down the yields on most assets and latterly because inflation has damaged the real value of any income derived from assets.

That may be one reason why only a third of the DFMs on our database have a dedicated income portfolio within their range.

A challenge for income investors has been that, after a decade of bond yields being so low as to not make much contribution to the needs of an income-focused client, yields are now negative due to higher inflation. 

Our database shows the average allocation to bonds in income portfolios is 30 per cent, with a very wide dispersion between providers.

The average is skewed massively by Invesco having a stonking 59 per cent in fixed income (with 38 per cent of that being in investment grade). Psigma are next at 39 per cent, with Rathbones and Morningstar both on 38 per cent.

Wise, so often an outlier when we crunch the numbers, continues this theme by having precisely zero allocated to fixed income funds. The next lowest allocation is AJ Bell on 16 per cent.

For those wondering, Wise has an allocation of 53 per cent to alternatives such as absolute return funds.

The average equity allocation is 50 per cent, with AJ Bell the largest on 67 per cent, and Handelsbanken the lowest at 34 per cent.

The fact there is a much narrower dispersion of equity allocations indicates the debate being had by DFMs is around the mix of bond and alternative assets exposures. 

Returning to fixed income land, the most widely held funds in income portfolios are Jupiter Strategic Bond and Schroder Strategic Credit.

The latter is approaching its 10 year anniversary. Run by Peter Harvey, it has assets of just over £600m and has a yield north of 5.5 per cent. 

The two funds might be tied in the number of DFMs which hold them, but they differ in most other respects.

For a start, the Jupiter fund is significantly larger at £3.6bn. But the differences are philosophical as well as practical.

The Schroders fund is significantly more aggressive, with around 80 per cent of its holdings in high yield bonds.

By contrast six of the Jupiter fund's top 10 holdings are developed market government bonds. This is reflected in a yield of 4.2 per cent.

The Schroder fund is significantly more concentrated, with its top 10 holdings making up 64 per cent of the fund, while the Jupiter fund’s top 10 holdings account for 22 per cent.

As economic storm clouds gather, the performance of those two funds is likely to strongly diverge.

It will be interesting to see how DFMs respond by backing one over the other in the coming year.

Passively we roll along

While the current market turbulence means outflows from active fund houses have become as commonplace as industry award events, we thought we would take a bit of a peek under the bonnet of DFMs' passive exposure. 

The most widely owned passive instrument among the DFMs on our database is Fidelity US Index, which is held in 12 portfolios. 

But this fact alone is somewhat deceptive because all the sectors with the highest proportion of passive holdings are bond sectors.

Indeed the only sector of our database where all holdings are passive is US Treasuries. The next highest is gilts where 81 per cent of holdings are passive.

The most popular passive bond mandate is L&G Sterling Inflation Linked Gilt Index, which appears in nine DFM portfolios and is the second most popular passive fund overall.

The least popular sector for passives (excluding those areas where there are no passive holdings such as direct property) is UK equity income, where only 1 per cent is passive thanks to one brave DFM's holding in Vanguard FTSE UK Equity Income Index. 

We also had some informal chats over the canapes with a number of DFMs to discover what they look for in a passive product. 

The number one consideration which concerns DFMs is tracking error: they want exposure to an index, not something which is almost exposure to an index.

The second consideration was liquidity and the risk associated with the provider’s own solvency. 

Our database shows relatively little take-up yet among DFMs for some of the more esoteric passive instruments which have come to market in recent years. The most widely held of those on our database is probably the L&G Global Real Estate Dividend Index, which is owned by seven of the DFMs on our list.

Currently only 32 per cent of listed property holdings are passive.

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