Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs. We know you're bombarded with information, so each day we'll be sifting through the mass to bring you what you need to know, backed up by exclusive data and research.
The long, slow death of the 60/40 model
"The conventional 60/40 portfolio won't work anymore" has been a common cry in retail investment for the past five, even ten years. Now others are sounding the same call. KKR, the private equity firm, published a 'Rethinking Asset Allocation' report earlier this week, following on from similar research published by Goldman at the start of October.
Why the delay in catching on? Partly because an old-fashioned 60/40 strategy has continued to do well for longer than expected. Bonds and equities both posted healthy returns right up until 2017, when things got a little trickier for fixed income managers. Even then, there was little in the way of serious drawdowns.
Wealth managers' standard practices have long since moved on. They've typically done so by trading some fixed income allocations for alternatives, as the chart below - drawn from our MPS tracker database - shows.
'Alternatives' as defined here constitutes a wide range of assets, from absolute return funds, to property, to commodity portfolios and others. The fixed income allocation is also somewhat different nowadays, courtesy of the strategic bond and short duration funds we looked at earlier this week.
Still, true diversification remains very much in the eye of the beholder, so it's worth considering what KKR and Goldman have to say.
Both papers emphasise the importance of recognising that correlations between different assets aren't static and are likely to shift further in future. That said, the big fear for 60/40 portfolios, that equities and bonds might drop simultaneously for a prolonged period, is given short shrift by Goldman.
And crucially, many DFMs will find their existing exposures chime well with the reports' investment preferences: KKR points to asset-based finance and private credit as areas of interest, whereas Goldman picks out structured products and call overwriting as offering value.
Quality shares finally come good again
Dividend strategies are almost always more cautious than growth funds, but 2018 was proving an exception to this rule - until this month.
It's been a tougher year for equity markets outside the US, with most indices flat or down over the first nine months, even before the current sell-off got going.
Dividend shares fared about the same as the wider market over that period, but they suffered in particular during the Q1 sell-off. Concerns over how far valuations had been bid up for quality growth stocks looked to be coming home to roost.
The pattern was the same wherever you looked: MSCI's regional High Dividend Yield indices failed to match conventional benchmarks in the UK, Europe, Japan and on a global basis in the first quarter.
That's common when overall market performance is good, but a less familiar sight when returns are in the red. And the indices screen for "quality" stocks, so this wasn't a case of high-yielding value traps being punished.
Normal service looks to have been resumed during a turbulent October, however. Over one month, the income indices have outperformed in every one of these regions.
Of course, that outperformance is only in the relative sense. Even the top performer, MSCI World High Dividend Yield, has still fallen by nearly 4 per cent. But the shift represents a small piece of comfort, perhaps, for those who believe seeking shelter is the right course for the rest of 2018.
Mixed messages for Gars
The year has gone from bad to worse for Gars. Performance continues to struggle, and hefty redemptions at the end of the third quarter saw RBC up its annual outflows forecast for the strategy from £10bn to £12bn on 12 October.
Most discretionaries have long since removed the fund from their portfolios, according to our model portfolio tracker. The exception has been Standard Life Wealth, which continued to hold the fund across its MPS range. But even SLW has now followed peers in selling down holdings.
As of May, Gars accounted for 10 per cent of SLW's Conventional 3 Portfolio – effectively its balanced model. That had been cut to 2.5 per cent by the end of last month as part of a wholesale rotation away from the fund across the range.
Like many of its rivals, the wealth manager has turned to Invesco as an alternative, buying into the Global Targeted Income fund, a move it says is due to the search for a more defensive portfolio with a yield pick-up.
Yet Standard Life Aberdeen's fund selectors have far from given up on the company's flagship strategy. This summer also saw SLW use a new volatility-managed equity capability to tweak alternatives exposure in some of its other ranges, but Gars' management team continue to run strategies in those models.
The flagship fund is also held in significant amounts across the portfolios SLW runs for its parent's advice arm, 1825. Most noteworthy of all, the MyFolio range run by Bambos Hambi still has £1bn invested in the strategy.
External pressures remain, however. Gars suffered its worst month for flows on record in September, a point by which SLW had concluded its disposals. And a short-term improvement in relative performance has been derailed by the events of October. The road to recovery still looks a slow one for the former fund buyer favourite.
