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The discretionary performance convergence problem
by Emma Dunkley on Feb 28, 2013 at 12:04
Wealth managers’ performance converged strongly across each risk category in the fourth quarter, data from Asset Risk Consultants reveals.
Figures from ARC’s private client indices show a significant narrowing of the difference between the best and worst performers with the bottom percentile of the ARC Sterling Cautious PCI managing an average return of 0.8%, compared to the best managers’ 1.5%.
A similarly pronounced effect was shown in the ARC Sterling Balanced PCI, where the top quarter managers returned 1.9% while the laggards provided a 1.2% return.
The close similarity of best and worst performing managers in each risk bucket is far more apparent for the last quarter of 2012 than at any other point over the last three years.
Since 2010, managers in the cautious sector returned 15.8%, some way ahead of the 11.4% return made by the poorest performing managers.
Daniel Hurdley, director at Asset Risk Consultants, said there were several factors at play. First, the macroeconomic environment has increased the correlation between asset classes, leaving managers less room for manoeuvre.
‘There has been quite a high correlation in returns among many of the asset classes. So where a manager may have diversified away from equities into other risk assets, they have seen a very similar return to equities,’ he said. ‘Thus, differences in asset allocation have not necessarily led to large differences in returns.’
‘The second factor is the liquidity bubble driven by high levels of quantitative easing, which has made bond markets very unattractive to managers. Combine this with the relatively low returns available from cash and hedge funds and in terms of the strategic asset allocation of the portfolio there hasn’t been a lot of room for differentiating performance versus another manager.’
How have certain managers outperformed?
However, while the high correlation of assets has made it difficult for managers to stand out, those who were first to play some of the most successful themes did outperform.
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