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Discretionaries split the passive vote; Rush for yield amplifies the bond/equity divide

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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Passive picks

As a pretty buoyant Q1 draws to a close, those who declared the return of a stockpickers’ market might be wondering what happened. But that’s not necessarily a big concern for DFM portfolios just yet: a rising market not only lifts many active managers, but plays out nicely for wealth firms’ passive holdings, too.

What’s more interesting than the perpetual active/passive debate is how investors are using the latter. As we discussed at the end of November, wealth managers still lean toward trackers over ETFs in general. But as with their passive choices in general, the balance can shift from region to region.

To get a clearer picture on this, we’ve unpicked exactly what kind of passive products DFMs are using in different equity regions, as per the chart below.

It's still the case that the average DFM only prefers ETFs over trackers when it comes to specialist offerings, such as sector-specific funds. At the same time, it's no surprise that trackers are better represented in the US, the region where DFMs are most amenable to broad-based market exposure.

What's more surprising is that ETFs are almost as well represented as conventional trackers in Europe. Given that many allocators feel iffy at best on the region, it could be a case of firms quickly establishing a position while they work out a longer-term view.

On the other side of the coin, ETFs have barely made an impression in Japan nor in Asia. The last is particularly notable, given the preponderance of such products in global emerging market allocations. A coincidence, perhaps - but this is one area that’s still split down conventional active-or-tracker lines.

Reaching up

The equity market saying one thing, and the bond market another, is a common enough phenomenon these days. There have been several such occurrences in the post crisis era, and investors are in a similar sort of place at the moment. The story of 2019 has been rising stock markets and falling bond yields.

But the past few weeks have seen a slight twist on this old occurrence. Equity investors have started to become a little unnerved by the action in government bond markets. Not enough to derail the rally entirely - yet - but there have been a few days of uneasiness.

That’s understandable, given the perception that recession risks are rising. At the same time, wealth managers keeping a close eye on their portfolios will have noted that other risk assets continue to rally. The likes of high-yield debt, for instance, has maintained its post-crisis reputation for being almost impervious to negative sentiment.

So while it’s been UK gilts that have raced away this month - the average UK gilt fund has risen 1.8 per cent over the past ten days - high-yield bond strategies have managed to tick up themselves, even as UK and global equity funds lose a little bit of shine.

This isn’t a common sight when the yield curve inverts and global slowdown rears into view. The answer must be that investors are, once again, prioritising the search for yield. It’s a quest that will ultimately end badly for those who are stretching too far. But for now, the rewards still seem to be within easy reach.

A path emerges

You may have noticed we’ve held off from discussing Brexit developments over the past few weeks - largely because for all the noise there’s been no sign of a way out of the impasse emerging. At first glance, yesterday’s events seem of a piece with that stalemate. But there’s reason to think things are starting to change. 

The initial reaction to yesterday’s developments was that the prime minister had agreed to do something, whereas Parliament failed to agree anything. In truth, it’s closer to the other way around. Theresa May’s resignation date remains as vague as ever, whereas Parliament is likely to have another shot at voting, on a smaller number of options, on Monday.

That seems reasonable enough, given one evening of votes has arguably brought a deal closer than it has been in two years’ worth of government negotiations. MPs were able to see where the land lies last night, and a secondary round of voting may adjust accordingly  - though the large number of abstentions means there is still an unknown quantity at play. 

The other question is whether a majority for either a customs union or referendum would be acceptable to the prime minister herself. The answer is almost certainly no - and as her deal is still dead in the water, that means a general election draws ever nearer.

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