Exceptions to the rule

The opening months of 2019 have been a welcome palate cleanser after a rather unsavoury period for wealth managers. But while many were content to forget and move on to the next course, not all discretionaries were happy to sit back and enjoy what came their way in recent weeks.

To illustrate this, we've looked at our MPS tracker to highlight some of January's less obvious moves. The chart below is based on 40 DFM Balanced model portfolios, and highlights the proportion that fought back against prevailing attitudes.

For equities, this meant reducing exposures in a good month for risk assets. For bonds, absolute return funds and cash, bucking the trend meant adding to weightings even as positive sentiment reigned.

Unsurprisingly, most discretionaries were happy to let markets run their course in January - though the dark blue bars do also contain a few wealth managers who actively added to their exposures even as the rally gained pace.

A minority did use the rosier sentiment as an opportunity to either take profits, increase their bond weightings, or both. But attitudes to cash represent the most obvious example of how the Q4 caution proved difficult to shake off.

Surprisingly, more than a quarter of DFMs opted to up cash weightings further last month. And there was little consistency in where they drew this money from: equity, bond and alternatives exposures were all susceptible to a reduction in allocations.

In theory, this caution should have also meant a return to absolute return. But the shaky performances recorded in the fourth quarter have evidently had an impact on wealth managers’ mindsets - despite December having shown signs of improvement. 

Of all those models assessed, just one increased AR exposure in January. Many more opted to sell down their allocations as the risk rally took hold. For the moment, it's the old-fashioned ballasts - bonds and cash - that are guarding against a return to the sour taste of Q4.

Short-term success stories

Some wealth managers may have been content to watch returns move back into black at the start of 2019, but there was plenty more going on under the surface on the fund selection front. And yesterday brought justification for some of these decisions, courtesy of the prospect of a delay to the UK’s EU withdrawal date.

That’s because more than one discretionary, believing that sterling was set to strengthen, has introduced currency hedges on overseas investments in the past few weeks. Sure enough, Tuesday saw the pound reach its highest level against the dollar in six months and the highest versus the euro in two years. 

What wealth managers didn’t do last month may also have aided them on the Brexit front. Despite concerns over open-ended property funds returning to the headlines, there was little sign of a further reduction in weightings: our data implies other investors may have been responsible for January’s £230m in net redemptions from physical property funds.

Either DFMs’ first-mover advantage is still intact - ie they got out ahead of these worries - or they’re not as bothered as some about a renewed risk of suspensions.

Fitch Ratings warned yesterday of a “growing risk” that funds would suspend next month, but that prediction was almost immediately overtaken by events in Parliament. Most have taken the prospective shift in the EU withdrawal date as a sign that a no-deal exit has been staved off, possibly for good.

That said, it does little to alter the underlying paralysis in the House of Commons.

If a short-term extension is agreed, the prime minister is likely to quickly resume her strategy of attempting to bounce other MPs into voting for her deal. Indeed, she has already attempted to up the stakes: yesterday’s insistence that the UK would not participate in forthcoming EU elections creates a new “cliff edge” date for the end of June that would be less easy to push back. Both sterling and open-ended property funds might very well be confronted by a new ticking-clock scenario later this summer.

Inverse excess

And finally, more apparent confirmation that the strong start to the year is being driven by little more than the Fed’s newly accommodative stance. In short, falling real yields are helping push almost everything else higher, as we highlighted the other week. What happens when those yields bottom out is the question on everyone’s lips - and not just for risk assets, but for correlations, too.

As the story notes, the negative correlation between inflation-linked bonds and equities (in the US) is the strongest it’s been for more than six years. That’s encouraged wealth managers to add to their bond exposure, as we touched on above and a few weeks back.

But correlations are never static, particularly not when they’re sitting at extreme levels. The early-2019 rally has lasted longer than many thought - February is drawing to a close with little sign of the sell-off that took hold this time last year - yet animal spirits are still in short supply. The uneasy quiet can only persist for so long.