Alternative issues

Alternative assets might sound like an investment panacea to some, but the term is vague enough to encompass all manner of different exposures. That was obvious enough in our recent analysis of Q4 performance figures.

By the same token, it’s not just about splitting hairs - there are clear dividing lines being drawn by wealth managers when it comes to their alternatives buckets. For a sense of underlying positions, we’ve used our MPS tracker to unpick how firms are dividing up weightings within their Balanced portfolios.

And while DFMs may be divided in their alts choices at either end of the model portfolio risk spectrum, there’s a much clearer consensus in the balanced world: hedge funds are out, and more conventional alternatives exposure is in:

Offerings from the likes of AHFM, Brevan Howard, and firms using the Montlake Ucits platform do still feature in these models. But hedge funds as a whole make up just 7 per cent of total alternatives exposure, compared with more than 50 per cent for absolute return or multi-asset strategies. There’s a wide world of daily-dealing hedge funds out there, but for most discretionaries, traditional asset managers are offering more than enough themselves.

As we’ve discussed, property and infrastructure offerings also remain in demand: they account for almost a third of total alternatives weightings, even if this category itself continues a variety of different strategies.

The big absence remains commodities exposure. The asset class accounts for 5.5 per cent of alternatives weightings - equivalent to just 1 per cent of an entire Balanced portfolio. That’s usually a little bit of portfolio insurance in the form of gold rather than anything racier. But eight out of ten DFMs still have no exposure at all. 

Triple threat back in the spotlight

Concerns continue to linger about shaky issuers of BBB bonds, the lowest rank of investment grade debt, being downgraded to junk status. But are fixed income managers really that fussed about the risk of fallen angels? Our analysis suggests otherwise.

We looked at the average strategic bond fund’s BBB position back in October and, since then, allocations have increased rather than decreased. DFMs' strategic bond picks had an average of 28.6 per cent in triple-B debt at the start of the year, up from 27 per cent at the start of Q4.

That’s partly because most investment-grade bonds had a better fourth quarter than high yield, but it might also be because managers are more concerned about the riskiest parts of their portfolio. CCC debt positions have withered even further to a sub-1 per cent average position.

Opinion is still split on those BBBs, though. One manager with a fair whack in the asset class is Craig Veysey, once of Sanlam and now at Man GLG. Roughly half his portfolio is in triple-B debt, but he’s not without concerns: yesterday he suggested that greater volatility could ultimately see plenty of the more cyclical issuers downgraded to high-yield status. 

Conversely, 24 Dynamic Bond continues to hold relatively small amounts of the debt: 15.6 per cent of the fund at last count. But the team is markedly more positive on the outlook for the sector. 

A new whitepaper from the boutique - coincidentally also published yesterday - says there’s no evidence the BBB boom has been driven by companies levering up, nor that it’s been cheaper than usual for these firms to issue triple-B bonds. 

Instead, their hunch is that the rapid expansion of this part of the market is due to ratings agencies “sharpening their pencils”, ie getting their act together having issued rather lenient ratings pre-crisis. They think active managers should be more than capable of avoiding the problem patches. With exposures now approaching a third of the average strategic bond fund portfolio, that should provide some reassurance to fund selectors.

Not so crowded trades

The latest Baml fund manager survey reiterates the point we made last month: asset managers are as uncertain as anyone over where to allocate next. 

January’s most crowded trade - long the US dollar - wasn’t as interesting as the fact that it wasn’t seen as that crowded a position anyway. That uncertainty has increased in February. Conviction in this month’s most crowded trade has dropped to the lowest level on record: just 18 per cent of fund managers opted for the ultimate winner.

And the identity of that winner is more unusual this time: long emerging markets, again for the first time on record. That also underlines the uneasiness - short EM was the third most crowded trade as recently as January.

No surprise then, that cash overweights are at their highest levels since 2009. More surprising is that equity allocations have dropped to a 2.5 year low despite January’s rebound. Investors aren’t quite believers in this rally just yet.