Category Investments

From wrap funds to a far more robust approach in investments

11 October 2019 Florbela Yates, Head: Momentum Investment Consulting

Florbela Yates, Head: Momentum Investment Consulting talks about Momentum’s 2020 vision for discretionary fund managers in South Africa

Discretionary Fund Managers (DFMs) have evolved enormously over the past few years. I still recall the old “wrap funds” which unfortunately referred layers of fees and any sub-par funds less obvious. The DFM offerings of today are a lot more robust. They typically offer clients the choice of using model portfolios, fund of funds or even personal share portfolios.

By partnering with a DFM, an adviser is able to focus on providing advice to investors through identifying their requirements, formulating a financial plan, calculating the tax consequences of executing this plan and re-evaluating the plan regularly. The DFM (or Category II asset manager) can then focus on building a suitable investment product that is able to cater for the client’s outcomes.

A skilled DFM should be able to develop a range of solutions which caters to different segments of an adviser’s client base and which includes both local and offshore solutions. For Category I advisers, the execution is often via an “off-the-shelf” model portfolio or collective investment scheme. But just as the DFM market has evolved, so too has the adviser landscape. With the looming introduction of RDR, SA has experienced an increase in the number of advisers applying for their own Category II licences. This allows advisers to legitimately build investment solutions for their advised clients.

But merely being in possession of a Category II licence, doesn’t equate to possessing skill in all the areas required. Many Category II advisers still choose to partner with an independent DFM. This DFM can assist with a range of services, from asset allocation, portfolio construction and optimisation, manager selection, mandate design to ensuring the solutions are available on multiple platforms.

What can an adviser expect from a DFM?
A skilled DFM will build solutions in partnership with the adviser and continuously evaluate these to ensure that they are still meeting their clients’ investment outcomes. Solutions need to be adequately diversified for a constantly changing environment as well as any exogenous factors (e.g. markets, political or economic factors) that may affect their performance. In an increasingly global world, it is no longer sufficient that DFMs offer entirely local solutions only but the DFM needs to be able to cater for truly global solutions. Having an offshore office is therefore key to staying relevant and providing global solutions.

An added complication in today’s world of low returns and increased volatility, the DFM needs to be able to offer varying strategies, access to alternative asset classes, negotiate competitive fees and manage the risk budget optimally to balance the scales between providing capital protection and delivering longer term real returns for their clients.

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