It has been very difficult to talk about major strategic shifts in retail financial services without mentioning the RDR.
But the impact of the centralised investment processes paper from the FCA coupled with technological improvements is having a more profound impact on which funds are winning the distribution battle.
As at May 2013, there were 13.7 million investors in the UK, of whom two million leave everything to an adviser, 4.2 million entirely self-serve and 7.4 million dip in and out of advice.
About three million clients have assets on an adviser platform. That is about £255bn as at June 2013. Of this, more than £50bn sits in model portfolios and this is growing as a proportion of assets extremely quickly. More is influenced by DFMs and of course, multi-manager. So – platform AUA = accelerating. Portfolios where investment is outsourced = accelerating. Model portfolio adoption = accelerating.
Over in direct land, it has been a story of select lists for some time. Over 80 per cent of the £115bn+ assets on direct platforms (of which £80bn+ is on funds) are channelled into Wealth 150s, Platinum 120s, Close 50s and other filters. Assets are accelerating as the number of IFAs falls and the banks retreat from the mass affluent markets.
In this compliance-led, technologically advanced environment what is happening with the actual fund selectors?
In June 2013, we interviewed 12 fund selectors from direct platforms, building societies, ratings agencies, research houses, model portfolio providers and DFMs. Here’s what they told us.
Fund manager tenure was continually cited as the most important element when reviewing a fund, with very few exceptions made. M&G’s Global Dividend fund manager Stuart Rhodes was one manager granted such dispensation. Seven years + was required by an increasingly sceptical bunch of selectors.
There was a consistent question mark by many about the ability of active managers to outperform over the long term in more established markets, particularly US equities and UK gilts. M&G’s Richard Woolnough and Royal London’s Paul Rayner were our selectors’ top picks in the fixed income space. Fidelity’s Ian Spreadbury also got a nod with Old Mutual’s Stewart Cowley gaining favour in the global arena.
More concerns were expressed about emerging markets where capacity issues are biting hard – selectors seem genuinely hard-pressed to find an Aberdeen or First State alternative. And here’s the rub. If you’re a multi-manager, you have a bit more freedom. If you’re managing a model, it’s all about sticking to the risk profile and managing the brand expectations that additional transparency brings – customers and advisers do derive comfort from known brands. Model portfolio managers are conscious of this.
We do live in a highly risk-dominated environment at the moment and an impact of the Cip work has been to introduce more of an element of box-ticking in the process. Fund management feels much more like a science than an art these days. “No-one ever got fired for buying IBM” rang out time and time again.
After 12 in-depth meetings and interviews, we had a total list of 29 fund managers who were the selectors’ top picks. Just nine (both brands and individuals) were mentioned by more than half of our selectors. Five were individuals, four were brands.
Neil Woodford – Invesco Perpetual
Nigel Thomas – Axa
Richard Buxton – Old Mutual
Richard Plackett – Blackrock
Richard Woolnough – M&G
This concentration will accelerate as the rise in outsourcing to a world of less than 100 key influencers and selectors continues.
We can see this in the direct channel too. If you take the select lists of nine leading platforms and crunch them together, there are just 16 funds which appear on at least 7 or more of these lists.
Interestingly, these direct lists were much less correlated to what our fund selectors thought, with more funds and brands in this non-advised space which did not resonate with our selectors at all. This could suggest that brand and commercial factors play a greater role in the direct channel shortlists today.
In conclusion, we’re well on our way to an era of blockbuster funds, big brand names and seeing 10 fund manager names mop up most of the retail assets.
Now clearly some of these will be passive managers too – the impact of the church of Dimensional cannot be ignored. The Dimensional Global Short-dated bond fund was the third best-selling fund on platform in Q1 13. And although models are picking up new flows, the fund picking world still dominates overall assets today. Good old GARS – a perennial favourite with IFAs and customers – was the top-selling fund on platforms in Q1 13. But this fund was not mentioned by any of our selectors and of course there have been a few removals vans driving around Edinburgh since then.
Quite what this impending concentration means for the consumer down the track is open for debate. What is clearer is the extremely difficult path ahead for mid-sized managers who aren’t playing in the world of models, DFMs and multi-managers – or making the right inroads with a smaller group of institutional fund selectors and influencers. Ouch.
Holly Mackay is managing director of The Platforum