Mr Patel, who currently uses some DFMs, finds their charges difficult to justify to clients in the Mifid II era. As a result, he expects to take over more investment responsibility in the future.
Those who do shy away are likely to miss out. Tim Stubbs, an investment consultant, argues that timing is key when it comes to getting the most out of an outperforming fund manager.
“Viewed in terms of a fund’s commercial life cycle, the early stages in which the manager might be purer in action, hungrier and less constrained from commercial issues can allow the investor to selectively access special investment opportunities,” he notes.
“This may contrast with funds that are further down in the road, at which point some of the early attractions may have faded or become diluted. The ideal is to arrive early in that journey, knowing when to hop off and on to the next promising story.”
It’s not impossible for advisers to gain exposure to smaller funds by using DFMs, but it’s still a minority sport best suited to wealth firms without substantial assets. Money Management’s sister publication, Asset Allocator, which carries out in-house analysis of the discretionary market, has found that small funds are rare sights in DFM portfolios.
Asset Allocator’s database of DFM model portfolio holdings, which tracks more than 1,000 different funds, shows just 5 per cent have less than £100m in assets. Only 2 per cent come in under the £50m threshold.
For those who do go the extra mile in the search for differentiation, big winners can appear in some unexpected places. This year the highest information ratio comes from a fixed income product, T Rowe Price Global High Income Bond.
Axa Sterling Corporate Bond is also in the top half of the table, when judged purely by its information ratio. This is in contrast with last year’s findings, but also the other two bond funds featured in Table 2 that languish towards the bottom on this metric.
As in our previous analysis, multi-asset funds rank highly by information ratio – most likely a testament to the wider investment universe available to them. UK equity funds also once again did well on this front. But, for a second year in a row, investment trusts failed to make the cut.
We have once again assessed how the funds fared versus both their peer groups and stated benchmarks.
Unlike last year, 2019’s standouts have on average fared better against their peer groups than their benchmarks, with two funds beating their sector average but lagging the relevant index.
In some cases, this can be down to an unfair comparison. JPM Global Equity Income, for example, is benchmarked against the MSCI AC World, arguably a more suitable index for outright growth funds.
