February fears

Signs of unease may be emerging among investors worldwide, but the plain sailing in January and February isn't yet a distant memory. And what DFMs did in those months could set the tone for the year ahead.

We've already discussed that February showed signs of being a different kind of rally to that seen in January. Discretionaries' asset allocation shifts last month would seem to agree with that sentiment: the most notable moves have a slightly different tone to them.

As per usual, we've analysed how 40 wealth managers' model portfolio allocations changed, and picked out some of the aggregate highlights in the chart below.

A good month for risk assets meant those with lower equity allocations must have taken an active decision to cut back. As the chart shows, this trend was most obvious in Japan. The sense is that plenty of wealth managers still aren't quite certain how to judge the country's prospects: it may not be the consensus sell that Europe is, but there are plenty who have opted to pare back weightings amid a strong start to the year.

A small proportion of managers also made cutbacks to their global holdings. That's perhaps a sign that where DFMs do commit to decisions, it’s in a specialist area that can benefit from increased dispersion.

On the whole, however, equity allocations weren't treated that sceptically in February. Not quite so many were content to ride the high-yield rally: around a third of those surveyed lowered their exposure, perhaps mindful of late-cycle risks.

The caveat is that not every wealth manager has dedicated HY positions - a smaller pool means isolated decisions to take profits have an outsize effect on the chart.

Nonetheless, there's no doubt that a broader sense of caution still prevails. That's best signified by the amount of dry powder on the sidelines: the average DFM has again upped cash levels at a time when rising asset prices should dilute them. The waiting game continues.

Fed up

The Fed must feel like it just can't win sometimes. Its commitment to tightening rates was widely seen as a major catalyst for last year's fourth-quarter slump. Cut to a few months later and that hawkishness is gone - but now it's dovishness at the central bank that's got investors worried about the global economy.

Last Thursday's shift has caused plenty of angst among investors already. US Treasury yields moved back below 2.5 per cent, equity markets have taken a hit, and the odds of the Fed cutting rather than raising rates this year have risen above 60 per cent, according to Bloomberg. 

So the good news for those DFMs who've been upping their government bond exposure doesn't bode particularly well. A study by Absolute Strategy Research, surveying 250 asset managers, found expectations of a global recession are now at their highest level for three years. And this survey was conducted prior to the latest Fed news.

Run the rule over some of the bond stalwarts favoured by UK wealth managers, however, and sentiment is more sanguine. 

M&G's absolute return bond manager Wolfgang Bauer described Jerome Powell's press conference as "far more balanced" than Mario Draghi's recent effort, though that probably isn't the highest bar to leap over. Kames head of rates Sandra Holdsworth said the dovish tilt was "probably a little excessive" given what was only a modest downgrade to forecasts. And Axa's Chris Iggo asserted recession risks remain low despite downside risks to growth.

Most think the Fed is, like wealth managers, still in "wait and see" mode. In theory, that should mean a continuation of the goldilocks scenario for investors. But equity markets' reaction has caught some off guard. Investors' response is more in line with the view voiced by Unigestion manager Olivier Marciot:

The dovishness...was another clear sign that macroeconomic conditions are rapidly decelerating globally, with the US being no exception...economic activity is rapidly slowing down and now below potential across the globe.

Familiar funds, with a twist

A statistic that may surprise at first: overall fund numbers rose across Europe in 2018 for the first time in eight years. 

The trend that made last year different can be summed up in a single word: Brexit. Asset managers redomiciling funds or splitting out assets had an outsized effect on overall numbers, according to data from Lipper at Refinitiv. Remove that factor and structural pressures, now exacerbated by Mifid II, continue to bear down on providers. The risks to 'orphan' funds remain as high as they ever were.

And if product innovation does surface this year, it could be a case of going back to the future. New launches from Invesco this morning are a case in point: two gilt ETFs, charging 0.06 per cent apiece. If the theme of today's email is that government bonds are back in vogue as diversifiers, then those providing low-cost exposure to this most traditional of asset classes could find themselves back in demand in 2019.