Don’t think about Discretionary Fund Managers as you normally do; give a moment to think about them as disruptors in the industry.
Matt Wood at AMFA recently wrote about the DFM space and how newer firms are challenging the traditional service offering, but what, as a newer DFM, do we mean by that?
Let’s start with what should be the common goal of all the players in this market: effective client outcomes. Effective client outcomes focus on the objectives of the client, their time horizon, cash flow requirements, availability of their adviser, investment performance, quality of reporting and fees to name a few. When there are so many considerations why is it that fees dominate the narrative when we speak about DFM value? It goes without saying fees need to be part of the value proposition, but it shouldn’t be the driving force behind a decision.
So, what should a good investment manager get paid for?
The clue is in the name - to get paid for managing investments. When you think about what is in the market today, you have DFMs charging fees as low as 15bps, with others charging fees that should make them stay awake at night. Quite often they’re doing the same thing. Most DFMs look to create market trackers across their model portfolios and manage costs of the underlying funds as much as possible, or in some cases find investors for their own funds.
What is the client outcome? Mediocre performance with little differentiation between DFM A, B, C or D. Ah ha! That’s why the fees dominate the conversation, as that’s the only difference!
This is where the market needs to offer advisers something different and pay the DFM for what they should be charging for - effective investment management. A DFM should look at the portfolio they create and think how best they can achieve a client outcome.
If we take a client who is looking for stable returns over a 5-year period without being exposed to excessive risk, the traditional DFM is going to allocate to several active fund managers and try and demonstrate their value comes in the careful curation of these funds and the ongoing monitoring. Very quickly their headline AMC at sub 0.25% is closer to a 1.00% cost to the client given the ongoing charges figure. The actual composition of the portfolio, i.e., what underlying companies, bonds and commodities are held look very much like a passive tracker. It’s not quite the ‘active’ management you may have come to expect. This may be OK, but if you are looking for demonstrable value where do you go?
This is where the ‘disruptors’ may be able to offer more
When we at O-IM constructed our Medium Risk Portfolio (we don’t call it Balanced!) it looks very different to the other DFMs.
We believe active funds, passive funds and direct equity exposure can provide better client outcomes. It can reduce ethe cost to the client and does seek to have stronger risk adjusted returns.
In our UK equity exposure, (approximately 25% of the portfolio), we have selected great UK companies where we have read board reports, financial statements, reviewed them against their peers, monitor daily, read analysts’ reports, considered their industry, and considered the wider macroeconomic support for the company.
Our alternative exposure is currently focused on commodities - we allocate to passive exchange traded notes so our exposure is direct to the physical commodity, as opposed to mining companies. Where we need greater expertise or ‘boots on the ground’ we look at the active managers and our small allocation, 0.45%, to Frontier Markets is managed by Schroders through their Frontier Markets Equity fund. Our AMC is 0.55% but underlying OCF is below 0.20%, so the cost to client is a very competitive 0.75% and represents the value we bring as a DFM.
This approach offers even more value creation for clients and advisers
For example, we manage an AIM portfolio and have researched and reviewed the best of breed companies in the AIM market and have a list of high conviction AIM listed equities that we continue to monitor and update. Unlike others, we don’t need to build a new team to do something different to what everyone else in the company is doing - they are here already researching great companies! Thanks to this our AIM portfolio is a natural extension of our offering, as opposed to a FOMO DFM product and can be priced at 0.95% AMC inc. VAT.
Above all else, I arrive back at the goal for DFMs and advisers - how do we achieve the best client outcomes? You make sure there is choice, and you focus on all the elements that bring value.