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Expat Financial Planning

Providing Client Clarity Since 1985

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Expat Financial Planning

Providing Client Clarity Since 1985

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    Discretionary Fund Management - Virtues & Benefits

    discretionary-fund-management

      What is discretionary fund management (DFM) ?

      In essence and in very simplistic terms the role of a discretionary fund manager (DFM) is to 'manage the managers' - in other words a discretionary fund manager is responsible for a number of tasks that include the initial and ongoing research of funds and fund managers , performing various due diligence activities on each of the funds and fund managers, the initial portfolio construction , periodic portfolio reporting and the all important continuous portfolio analysis and re-alignment of positions according to economic and mandate factors when required.

      If you are an existing investor it may help if you first think and consider how you made previous investment decisions.

      • what objective criteria did you have for your investments ?
      • what research did you employ ?
      • what risk evaluations did you perform ?
      • how you did you apply selection criteria ?
      • what on-going monitoring , re-balancing and market assessments are now being applied?

      Some investors would ask :

      • Does a DFM really bring value to the investment portfolio ? - after all most of us have the ability to buy funds , stocks and shares without using a DFM.
      • Can DFM charges be warranted ?

      We believe the answers to the last two questions are an emphatic YES for the vast majority of investors

      Lets now take a closer look at what a Discretionary Fund Manager does , how he does it , why he does it and the value provided to investors.

      Discretionary fund manager processes

      You will note in the image "DFM Processes" that there are 5 fundamental tasks that need to be performed in respect of portfolio creation namely :

      • Research
      • Due diligence
      • Investment strategy
      • Risk management
      • Portfolio analysis - monitoring and re-positioning

      discretionary-fund-manager-work-process

      DFM Processes

      • Research
      • Due diligence
      • Investment strategy
      • Risk management
      • Portfolio analysis - monitoring and re-positioning

      In-depth fund research

      All Discretionary Fund Manager portfolios are diversified not only by underlying investment asset and sector, but also by manager and corporate provider. Discretionary Fund Managers believe this research discipline to be an essential element in adding value to investment portfolios and risk diversification.

      Creating “best of breed” multi-manager portfolios requires Discretionary Fund Managers to devote significant resource to fund research and due-diligence.

      The universe of investment funds increase daily.

      Discretionary Fund Managers will use numerous databases, sophisticated filters and screens to highlight funds that may be of interest to their investment teams. Analysts then conduct peer-group analysis and other desk based research to produce a more targeted group of funds the Discretionary Fund Manager believe worthy of further investigation.

      To understand the strengths and weakness of any fund, its strategy, process or manager requires that a Discretionary Fund Manager conduct face-to-face meetings with fund managers and their counterparts. A Discretionary Fund Manager will conduct meetings throughout the year to ensure they are fully comfortable with any fund before it becomes worthy of the Discretionary Fund Managers panel.

      All Discretionary Fund Manager funds are monitored on an ongoing basis and reviewed for consistency and style shift.

      Whilst there have always been a small number of “star” managers or funds which consistently perform regardless of the current market environment these are unfortunately few in number.

      The majority of funds will follow strategies tailored to certain sets of market conditions, whether though market sector or asset class.

      Understanding these synergies and anticipating which, how and when these funds will perform and equally are likely to under-perform are skills developed through many years of experience and implementation of the research process.

      A Discretionary Fund Managers comprehensive fund research reports are continually and critically reviewed and updated.

      Due diligence

      Factors that the research team will closely monitor in terms of a potential fund or fund manager include :

      • The regulatory jurisdiction of the manager and the fund
      • Compliance - are all requirements signed off
      • Liquidity - what are the details of the financial balance sheet

      The above checks and balances are required to be performed on each and every potential fund to be considered for a client portfolio and will additionally be performed routinely to ensure on-going compliance

      discretionary-fund-manager-due-diligence

      Due Diligence Processes

      Due diligence

      discretionary-fund-manager-due-diligence

      Due Diligence Processes

      Factors that the research team will closely monitor in terms of a potential fund or fund manager include :

      • The regulatory jurisdiction of the manager and the fund
      • Compliance - are all requirements signed off
      • Liquidity - what are the details of the financial balance sheet

      The above checks and balances are required to be performed on each and every potential fund to be considered for a client portfolio and will additionally be performed routinely to ensure on-going compliance

      Strategy

      dfm-client-portfolio

      Portfolio Construction Process

      Discretionary Fund Managers believe value extraction is best achieved through medium to long-term strategic allocation to sectors and asset classes best poised to generate the risk/reward they require over these periods.

      A portfolio selection implies a strategic asset allocation and boundaries around which this allocation can be changed.

      There are often occasions when a Discretionary Fund Manager will recognise increased risk or increased opportunity potential within the financial markets. Within this strategic framework therefore a Discretionary Fund Manager can make short and medium term tactical allocation decisions to ensure that portfolios remain responsive to prevailing market conditions.

      Often, rather than simply making marginal decisions, a Discretionary Fund Manager will make firm market calls and if necessary act decisively and alter portfolios to reflect the current investment environment

      Risk management - a constant review process

      Senior investment management personnel together with the Chief Investment Officer (CIO) meet regularly to direct and supervise the investment management teams who implement the day-to-day investment policy and strategy in pursuit of the investment goals.

      Beyond that, investment management and research teams review economic data and market factors that impact ongoing portfolio risk and performance on a daily basis.

      This consistent process allows managers to make tactical portfolio allocation changes swiftly and decisively should market conditions necessitate it.

      trading-research

      Portfolio Monitoring


      Tactical portfolios changes are generally shorter term in nature.These are used to reduce risk within a portfolio and preserve capital or conversely increase risk to capture more transitory opportunities.

      As part of a Discretionary Fund Managers asset allocation strategy DFM's have the flexibility to change the weightings of the asset allocation within a portfolio. The eventual weightings within a portfolio will be a function of market conditions and investment strategy.

      Risk management - a constant review process

      trading-research

      Portfolio Monitoring

      Senior investment management personnel together with the Chief Investment Officer (CIO) meet regularly to direct and supervise the investment management teams who implement the day-to-day investment policy and strategy in pursuit of the investment goals.

      Beyond that, investment management and research teams review economic data and market factors that impact ongoing portfolio risk and performance on a daily basis.

      This consistent process allows managers to make tactical portfolio allocation changes swiftly and decisively should market conditions necessitate it.

      Tactical portfolios changes are generally shorter term in nature.These are used to reduce risk within a portfolio and preserve capital or conversely increase risk to capture more transitory opportunities.

      As part of a Discretionary Fund Managers asset allocation strategy DFM's have the flexibility to change the weightings of the asset allocation within a portfolio. The eventual weightings within a portfolio will be a function of market conditions and investment strategy.

      Frequently Asked Questions

      We hope that the above information has proved insightful and beneficial.

      We also hope that you now have a clearer understanding as to why we as expat financial planning advisors see true value in our Discretionary Fund Manager partners , TAM International , Momentum, City Financial and Canaccord Genuity.

      Accessing DFM managers can be accomplished using Personal Portfolio Bonds and in some cases directly with the DFM manager.

      The links below provide additional sources of information and updates.

      If you have any questions or queries please get in touch by using the "Ask DFM Questions Here" button.

      Further resources

      Market Indicator - Momentum fund management provide insightful views on equity market trends
      Video Updates - Watch and listen to our Discretionary Fund Manager (DFM) partner videos. The videos provide an insight to the managers thoughts and feelings in respect of market events alongside specific details on portfolio performance
      Market Scope - e-newsletter - don't miss out on important market events - subscribe now its Free
      Our Blog - Commentary and updates on market events - insurances - pensions - investments - taxation and all other issues related to expat financial planning