The data in the chart was collected during the summer of 2009 and there have been considerable rallies in markets in the latter part of the year. But there really aren’t any surprises.
The vast majority (70.6%) of DFMs declared that the performance of the portfolios they managed over the previous 12 months – net of fees, remember – was negative, between -1% and -19%. Not great, but in the greater context, not so bad.
It has to be remembered that in 2008, equity markets more than halved. That isn’t any good whether you are running your portfolio on an active or a passive basis. But yes, a properly diversified portfolio won’t be heavily biased towards equity exposure, particularly not in the high net worth arena.
But through 2008 and even into 2009, the structural nature of the credit crunch demonstrated once and for all that there are conditions in which there is no such thing as ‘uncorrelated’ asset classes.
Of course, that doesn’t mean to say that everyone failed. No, 11.8% of managers said their performance remained flat, while more – 17.6% – said they had seen an increase in performance of between 1% and 19%. Now, the chances are that it will be at the lower end, but to have delivered any positive returns over that 12 month period suggests either they are running sky high volatility across their clients’ portfolios (that’s above and beyond whatever the market can throw at them), or they’re doing something right. After all, there has been no safe haven in cash for the past couple of years.
Looking back over a longer period, in this case three years, the performance improves considerably, with all providers having protected capital or delivered returns.
More than half (53.6%) declared to have delivered between 1% and 19% positive performance. However, that leaves a worrying proportion of 46.7% having delivered nothing at all.
This is where the naysayers will say that DFMs do not deliver value to the client, but merely extract more fees. It’s a point, and on this evidence a reasonable one, but it must be remembered the unprecedented markets – and I use the word advisedly, certainly in living memory for those operating in this market – will have stripped much outperformance away in a trice.
Far more encouraging are the figures for a five-year period, with 60% delivering 15 to 19% positive performance with a considerable 40% achieving 20–40%.
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What is a meaningful time period for determining performance? |
One director of a wealth management company who preferred not to be named, tells HNW that performance is one of his two biggest bones of contention, especially about how it is assessed.
“If I was marketing a DFM service, I would always select the best portfolio in the thousand we manage,” he says. “My second concern is always that clients can be charged heavily for the replication of the same portfolios for similar profiles of client. That is really a fund of funds.”
Another niggle is that he believes DFMs are increasingly “constrained by the panel approaches of their corporate (generally retail risk averse) masters”.
He’s not totally negative, however, as he believes DFMs “tend to avoid the opaque charging endemic in the insurance world, actually occasionally use alternatives and investment trusts and can improve the adviser relationship with their clients, even if that is by ‘absolving’ them of the full responsibility for losing client money”.
He also praises DFMs that use target returns and risk appetite in constructing appropriate portfolios.
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