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The concept of an aggressive or adventurous portfolio might make a few investors shudder at the moment. But those seeking to seize the day by turning more positive on risk assets will be pondering exactly this kind of MPS offering.
Our analysis of DFMs’ asset allocations has thus far tended to focus on Balanced model portfolios as a proxy for best ideas. But our fund selection database holds information on models across the risk spectrum, so today we’ve taken a closer look at how wealth firms cater for clients prepared to ramp up risk.
The chart below shows the average equity allocations for a typical Adventurous portfolio as of November. For ease of comparison, all those included in the sample have a Distribution Technology risk rating of 7 - the most common rating at the higher end of the scale.
In keeping with the tenets of risk-rated portfolios, most wealth managers tend to increase equity exposures on a proportionate basis rather than piling in to the most volatile areas. True, there is the odd firm whose Adventurous portfolio has more than 20 per cent in EM and Asia Pacific equities, but they’re the exception not the rule. Just one such model in our sample held a dedicated frontier markets fund, for instance.
Indeed, compare these allocations with those of a typical Balanced model, and the only obvious change is the increased presence of global and specialist equity funds. More often than not, the latter category equates to a tech position - Polar Capital Global Technology shows up again and again in these higher-risk portfolios.
Home bias is alive and well despite such decisions. UK funds still account for around a third of all equity exposure in higher-risk portfolios. That said, while we’ve also separated out UK smaller companies exposure on this occasion, small caps remain an area of limited interest for wealth managers. The typical Adventurous allocation has just 2.2 per cent in the asset class.
Back to 2016
History doesn't repeat itself, but it does sometimes rhyme. Conscious of that old saying, and still nursing the scars of 2008, investors have spent plenty of time over the past decade worrying what might cause the next crisis - even as returns continued to soar.
But at the moment it's the events of early 2016, not 2008, which have a ring of familiarity to them. We don't (yet) have a referendum on the UK’s relationship with the EU, but consider the following: then as now, investors' minds were preoccupied with falling oil prices, concerns about Fed tightening and, inevitably, the risk of a Chinese slowdown.
Investors' reactions were as recognisable as their worries. Back then we also saw hefty drawdowns for the likes of US, UK and Japanese equity markets before the rally resumed. And quality or low volatility stocks were the hiding place of choice for many investors.
We may now be three years further into the cycle, but analysts are starting to think we're in for a similar rebound this year. Bank of America has turned positive on credit this week, pointing to the parallels with early 2016. And talk of a pause from the Fed has again started to weigh on the dollar and help out a variety of asset classes accordingly.
But there might be one part of the global economy that doesn't go in for a repeat. There’s little sign that China is ready to prime the pumps as it did three years ago. Alongside a more dovish Fed, Beijing's summer 2016 stimulus helped resurrect the global economy – whether it does so this year could again have an outsize effect on wealth managers’ portfolios.
The start of January means the one-year anniversary of the Mifid II overhaul - and many of its effects are only just starting to be felt.
First came the 10 per cent drop warnings that many wealth firms were forced to issue in the final quarter of 2018; an exercise in testing commitments to long-term investing if ever there was one.
Next up is another extra piece of disclosure, in the form of newly-detailed documents showing exactly what adviser and DFM clients have paid, and to whom, over the past year. The damage done to portfolios in Q4 ups the odds that clients of the more expensive providers will feel hard done by when they read these missives.
Nonetheless, like-for-like comparisons are going to prove tricky: there’s little sign of co-ordination on this particular front. As Mark Polson of the Lang Cat consultancy recently noted, ex-post disclosures “are shaping up to be the regulatory version of that bit in Apocalypse Now at the Do Lung Bridge”. Wealth managers may be entering “the age of transparency”, but it looks like they’ll still have some time yet to get their houses in order.