Dan Jones  

Small but mighty: Advisers' competitive edge

Dan Jones

After several years of rapid shifts, the retail fund distribution landscape is starting to look a little more stable these days.

Merger and acquisition activity may still be on the rise, but there’s no longer the sense of a rapid growth in one part of the market at the expense of another.

That’s because the discretionary fund management (DFM) sector has carved out a sizeable niche for itself in double-quick time. Those excess growth rates, inevitably, prove hard to maintain for too long. So it’s not surprising that we’ve seen attention start to focus on the cohort of advisers seeking discretionary permissions themselves.

This isn’t a case of the pendulum shifting back the other way: I suspect DFMs will continue to grow their market share. But it is evidence that a not-insignificant body of advisers are committed to making investment decisions themselves, either on an advisory or a discretionary basis.

Those advisers are Money Management’s natural readership. Given this new environment, we want to do our bit to help intermediaries retain their competitive edge. And when it comes to investment decisions and fund selection, there’s an obvious path to take. A couple of years ago, working elsewhere at the FT, I discussed what advisers could do on this front. The conclusions seem to me to still be relevant.

Standing out from the crowd is becoming increasingly important for fund selectors – or at least, it should be. 

Most intermediaries are now aware of the need for differentiation, and there are tentative signs this is leading to a wider range of fund choices. Yet there’s no denying that behavioural instincts encourage investment in larger funds.

Buying smaller funds can feel riskier, irrespective of their actual attributes. They don’t have the accolades of their larger peers. They sometimes don’t even have the longer-term track records.

But these funds represent a real opportunity for advisers. As we discuss in our feature on page 43 onwards, the competition – DFMs and the like – simply aren’t able to invest in these products due to the size of their own portfolios.

Many advisers have no such size constraints. That looks to me like a competitive advantage, and a way to ensure client portfolios are spread across a diverse range of funds.

This isn’t just about the importance of diversification, either. There is also an increasingly prominent school of thought that states the best returns can be made at the beginning of a fund’s life.

The difficulty, clearly, is working out which of these smaller funds have the potential to be winners. 

To that end, we’ll be trying to help out, starting with this month’s small fund standouts feature that assesses sub-£100m funds on a quantitative basis. In coming issues, we’ll also look at the latest multi-asset funds, and ask what advisers can do to strengthen the quality of their own investment committees.