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Asset Allocator

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Equity income funds head further afield; Late-cycle calls overhaul model portfolios

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. 

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Concentration game

The UK equity income universe may be offering bumper yields, but it’s not the only game in town when it comes to dividends. DFMs feeling jittery about significant exposure to the domestic market can always reach out to global counterparts.

Global income funds have a much larger pool of stocks from which to choose, of course. That means a greater level of dispersion when it comes to funds’ holdings, and more work to do for DFMs wanting to keep track of these exposures.

Following our assessment of discretionaries’ top UK equity income picks and their exposure to the biggest dividend payers, we’ve carried out the same analysis on a global scale, ranking top funds’ exposure to the biggest dividend payers worldwide, as per Janus Henderson’s Global Dividend Index.

True enough, the chart shows DFMs’ favourite global income funds have little in common with one another. Fidelity Global Dividend and Investec Global Quality Equity Income both have more than 9 per cent in the top 10 dividend payers, but half the group have less than five per cent. A similar picture emerges when it comes to the top five payers.

Of the top distributors, the most widely held is Microsoft, which is backed by six of the funds above. But two of the top payers - AT&T and China Construction Bank - don't feature among any of the funds' holdings as of their latest report and accounts.

Global equity income managers have plenty of problems to contend with: take, for instance, a focus on US stocks that often requires them to sacrifice yield, as we reported late last year. But the evidence indicates their larger universe of potential holdings has at least enabled them to avoid some of the concentration concerns apparent in the UK equity income space.

Late in the day

This weekend marked 10 years of the bull market, and plenty of commentators have been at pains to point out the distinguishing features of the current rally. 

It’s the longest on record but also, by some metrics, one of the slowest. This long, relatively slow grind higher is typical of the caution that has characterised investors since 2008. That might be a good thing: the bears may have died off, but the bulls have never got ahead of themselves in the way they once did. 

From wealth managers’ perspective, the past decade has given them plenty of leeway to calibrate their portfolios in preparation for late-cycle investing. Many now judge markets to be at that point - but their interpretations of what this means can be very different.

We’ve already looked at those who are taking outsized over- or underweights to regions such as the US, Europe and Japan. But even those somewhere in the middle have difficult calls to make. The UK and the US are always likely to form the bedrock of a Balanced model portfolio, even at this stage of the cycle. But DFMs are split down the middle when it comes to the relative merits of other equity markets.

For example, Europe’s ongoing travails mean one in four discretionaries now has a higher weighting to Japan than to continental shares in their Balanced models, according to our database. The ECB’s latest stimulus package may not be enough to prompt a change in sentiment, given the Bank of Japan’s own efforts on this front.

More notably, emerging markets’ recent return to favour means a separate one of four wealth managers now allocate more to EMs than they do to Europe and Japan combined. 

But DFMs playing the developing market story still prefer to do so in one particular way. Back in October, we noted that half of all asset allocators held more in dedicated Asia ex-Japan funds than they did in traditional EM portfolios.

Five months later, and specialisation has increased. Almost two thirds of allocators now prefer Asia funds to their more generalised emerging market counterparts. Given the way allocators have been burned before in some EM regions, this is likely yet another sign of late-cycle caution.

Property: reasons to be cheerful?

Holding onto an unloved fund can be a sly contrarian play in plenty of sectors, but not in open-ended property: the latest rush for the door means bigger headaches for remaining investors, whether it’s price swings or another gating fiasco.

But a little bit of good news on this front: research provider Cerulli believes demand for open-ended property funds could hold up better than expected.

Here’s Andre Schnurrenberger, the firm’s managing director for Europe:

The need for diversification means that property will remain a significant part of most investors’ portfolios, despite the risk of it suffering some short-term performance issues as retail chains close outlets.

Cerulli’s analysis does encompass the European market, but doesn’t fail to note the UK’s Brexit jitters or the FCA’s latest considerations on the open-ended sector.

The question for holders of UK physical property funds is whether the portfolios can stick out the nervousness. Anecdotally, most DFMs seem to think the UK will eventually secure some kind of Brexit deal, a result which would ease concerns for real estate. But latest outflows indicate not all are willing to take the risk with this particular asset class.

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