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Investing in DFMs - October 2016Access to data at point of sale is key
Provision of accurate performance data on discretionary fund managers (DFMs) has been patchy in the past, often failing to give a comprehensive picture of what investors can expect when selecting a DFM.
Asset Risk Consultants runs four private client indices (PCIs) that can provide some insight for advisers when turning to DFMs on behalf of their clients. These indices provide performance figures gathered from 63 private client discretionary investment managers, which is up from 50 investment houses in November 2015.
Each of the four categories – Cautious, Balanced Asset, Steady Growth and Equity Risk – is named after its risk profile relative to equity markets.
More data is clearly becoming available, but James Goward, head of sales support at Rathbones, points out that the challenge for advisers is accessing performance figures at the point of sale.
He explains: “DFMs can provide all sorts of performance data once the client is on board, but it’s where you’re perhaps looking to introduce a client for the first time in that pre-sales stage and you want to understand the performance of a DFM. Advisers have only been able to rely on a DFM maintaining some sort of model portfolio as an example of what performance could look like. Or [by] providing existing client data based on portfolios that are run to a similar mandate that they’re looking for.”
DFMs can simply provide data from clients’ best-performing portfolios, which Mr Goward says is “not overly helpful to advisers, particularly when the regulator has insisted advisers should be more cognisant of things like price and performance in the past couple of years”.
Mr Goward adds: “Now the problem with price and performance is that they are relatively blunt measures in determining what we do. I think the regulator puts focus around those areas because of the increasing use of model portfolio services.” He insists comparing performance is helpful in choosing a DFM though, and suggests advisers are increasingly reliant on Asset Risk Consultants’ PCIs for peer analysis.
Nic Spicer, portfolio manager and head of research at PortfolioMetrix, believes most investment performance statistics should carry a “health warning”.
He explains: “The truth is that many investment portfolio ranges, particularly popular off-the-shelf risk-rated model portfolios, do not achieve good risk-return separation.
“By this I mean there being a clear progression in terms of risk level across the range [from least risky to most risky] and commensurately higher returns being earned for each step up in risk across the range over time.”
Mr Spicer argues that focusing too much on individual portfolios rather than the range of all products, chasing high-performance returns, lack of diversification and weak investment processes can all lead to unsuitable results for clients. He adds this will have “costly implications for advisers when clients justifiably query the suitability of the investment selection”.
Investors should of course question an adviser if they are not satisfied with the performance of the DFM in relation to their chosen risk level.
Alan Beaney, investment director at RC Brown Investment Management, points out: “Riskier strategies over time should produce higher returns than lower risk strategies, and the short-term volatility of higher-risk strategies should be higher. There may be some periods where this is not true, but very few. [Advisers] should be rather sceptical if this is not the case. Also, seemingly high returns with little apparent risk should be treated the same.”
Over the past year the FTSE WMA private investor indices have generally performed in line with the risk level to which their names allude.
The FTSE WMA Stock Market Global Growth index is up 31 per cent in the past 12 months to October 13 2016, but the FTSE WMA Stock Market Conservative index generated a performance that is a little better than conservative, up 12.5 per cent. The Balanced index falls in the middle of the five indices in performance terms. But Mr Spicer warns poorly defined labels such as “cautious, balanced or aggressive” can often mean different things to different people.
However, it seems the availability of performance data is going in the right direction. Mr Goward adds: “I think when it comes to performance, the key for advisers is just trying to get that element of independent verification and validation that the performance is what a DFM says it is.”
Ellie Duncan is deputy features editor at Investment Adviser
