Triple trouble ahead?

We've come to think of the equity market as resilient, but it's got nothing on high-yield debt. The US economy is well into the current economic cycle, and the rate rises keep coming, yet riskier bonds are outperforming investment grade again this year.

Mike Mackenzie noted on Wednesday that junk bonds' performance is partly because CCC-rated debt – the very riskiest grouping – is positively correlated with higher oil prices. But these highly leveraged companies are still the biggest cause for concern for high-yield bears.

Others argue the biggest borrowing problem may not lie with high yield at all, and point the finger at bonds rated BBB (the lowest investment grade notch). These names in particular have benefited from cheap borrowing since the crash, to the extent that many are now heavily indebted.

With these worries in mind, how do the go-anywhere funds owned by wealth managers stack up? Most strategic bond funds understandably disclose the credit quality of their positions – though there are still some mystifying holdouts – so we've ranked 30 in our database based on how much they have in BBB and CCC debt. 

The funds in the graph below have been ordered by their popularity with DFMs, with the most widely held names sitting on the left.

It's immediately apparent that sizeable CCC allocations are pretty much non-existent, with the average weighting sitting at just 1.6 per cent. That's not the case for BBB debt, which typically accounts for more than 25 per cent of these funds' holdings. 

Let's pick out some notables to give some context to the chart: BlackRock Sterling Strategic Bond, with almost 70 per cent in BBB debt, for one. M&G Optimal Income, Fidelity Extra Income, Aviva Strategic Bond and Tideway Credit are the others with more than 40 per cent in this area. 

It's striking, though, that none of these combines this weighting with a similarly high level of CCC debt. The biggest backers of the latter include Artemis High Income and Investec Total Return Credit.

But what's most reassuring for those who may have concerns is that the two most popular funds with wealth managers – Jupiter Strategic Bond and 24 Dynamic Bond -  have very little allocated to either BBB or CCC debt.

Market report: winners and losers in the UK fund universe

If there's a profit warning or takeover bid hitting the headlines at the start of the day, we'll let you know which DFM favourites are most affected.

Trade wars and quantitative tightening have had less of an obvious impact on markets this week, but there are usually stock specifics to reckon with. It's a relatively quiet UK open today, but one share that does stand out is Games Workshop.

The company has bucked the trend of struggling UK retailers for several years now, soaring into the FTSE 250 in March. This morning, however, a short trading update has been enough to dampen animal spirits. A reference to "uncertainties" looming in future trading periods has proved enough to push shares down 9 per cent.

Games Workshop's status as a former small-cap darling means the firm retains a place in many smaller companies portfolios even now, as the chart below shows. Data is to 30 September, or 31 August in JPM's case.

The name taking the biggest hit is a fund that has drawn in a growing number of supporters for its stellar performance: SDL UK Buffettology. But the stock will have to fall much, much further before it puts a dent in the gains already made by these managers.

That said, one fund appears to have turned more cautious at just the right time. Chelverton UK Equity Income, among the top holders as of the end of August, said last month it had cut its position. The stock no longer features in its top 20.

A tale of two trackers

Another bad session for Chinese stocks overnight saw the CSI 300 index hit a two-year low. It's unfortunate timing, given MSCI is consulting on whether to quadruple the presence of China A-Shares in its flagship EM index, and FTSE Russell has also decided to include them for the first time. 

The former change would see A-Shares make up 3.4 per cent of the MSCI index by mid-2020, up from 0.7 per cent now. FTSE Russell's move would put its own weighting at 5.5 per cent.

While smaller in scope, MSCI's benchmark decisions are often accompanied by a level of fanfare that FTSE's aren't, simply because of the weight of money tracking the former index. The most popular passive and active EM funds in our database all follow or are benchmarked against the MSCI, with one exception – Legal & General's tracker. And that could make it stand out in future.

The current difference between the two benchmarks largely stems from one decision made way back in 2009, and another in 2014. The first saw FTSE remove South Korea from its EM index by upgrading it to developed market status. The second saw MSCI rule out the possibility of doing the same. That means Korea still has a 15 per cent weighting in the latter benchmark.

Nowadays, the active funds most favoured by DFMs and wealth managers all have between 5 and 10 per cent in Korea - but this may be a case of the tail wagging the dog. There's a lot of benchmark risk in zero-weighting such a large part of the index.

For the FTSE, unrestrained by the need to include Korea, other countries have a bigger presence. Chinese (ie Hong Kong) stocks already take up three percentage points more space than in the MSCI. So as Beijing's benchmark presence grows over the coming years, so too could the differences between the two indices – and the trackers that follow them.