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Asset Allocator

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Discretionaries' income portfolios hang in the balance; The search for bond believers

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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Income outcomes

As discretionaries continue to expand their product ranges, there's a growing risk they end up providing simply too much choice, confusing both clients and investment managers in the process.

Our recent research has shown there's clear water between DFMs’ Income and Balanced portfolios when it comes to asset allocation. But look at the actual income on offer, and the distance between the two isn't always that obvious.

That's partly because Balanced model portfolios are relatively good at throwing off income. An average yield of 2 per cent may sound paltry, but let's not forget this is 2019. Nowadays the average balanced multi-asset open-ended fund yields just 1.6 per cent according to FE data.

Of course, neither of these figures is likely to be enough to meet most clients' income needs. Hence the arrival of dedicated portfolios.

But are they really producing enough of a boost to warrant their own existence? Our analysis suggests the typical DFM income portfolio yields 3.3 per cent - low enough to be sustainable, perhaps still not quite high enough to satisfy all clients, but acceptable enough in the modern age.

That said, there are still some cases where the gap between the two types of model is pretty slim, as the chart below shows:

For some wealth firms, the Balanced portfolio pays out almost as much as its Income peer. In cases where both offer meagre yields, it's probably time for a rethink. Some DFMs do offer a High Income strategy to meet the demand for higher payouts - they should consider culling overlapping products, too.

Bonding exercise

Professional investors have loved to hate government bonds over the past decade - and then watched with frustration as that dislike worked against them. Perennially under-owned outside the institutional world, bonds nonetheless hit record high after record high as deflationary concerns took hold.

That trend has reasserted itself over the past six months, as the Fed pauses its hiking cycle and global growth concerns re-emerge. This morning, for instance, 10-year bund yields fell below -0.11 per cent for the first time since 2016.

And there are indications that investment managers are dialling down their hostility just a little. Buried in the latest Bank of America Merrill Lynch fund manager survey is a statistic showing that global bond allocations are at a seven-year high, driven by a resurgence in risk-off sentiment.

The considerable caveat is that this "peak", which has now persisted for the past two months, is in reality a net underweight of 34 per cent. No overweight to the asset class has been recorded since early 2009.

What's more, if DFMs' own actions are anything to go by, a significant proportion of this increased interest can be put down to tactical rather than strategic buying. That makes sense when yields are so low: as we touched upon yesterday, long-duration trades are as rare as ever. 

But the Baml survey also implies that even tactical positions are being treated with great scepticism. The number of managers who think 10-year Treasury yields will trade above 3 per cent in the next year is still five times as high as the proportion backing a move below 2 per cent. With yields now sitting at 2.39 per cent, there's plenty of potential for allocators to be caught out once again in 2019.

A tightening grip

Retail fund redemptions have continued in the face of rising markets this year, but that hasn't been a problem for Hargreaves Lansdown. After a bruising fourth quarter the D2C giant this morning reported a net inflow of £2.9bn for the four months to April 30.

Part of this comes via back-book transfers, and the headline figure remains lower than the £3.3bn garnered in tougher markets this time last year. But assets are nonetheless rapidly approaching the £100bn mark. Crucially, the platform continues to win market share, according to Numis: the broker says it now accounts for almost 42 per cent of the total D2C market.

The advised world has long since learned to live with the rise of the direct investor. But if there does come a tipping point where clients start to shift over to DIY en masse, it's still more likely to come from Hargreaves than a robo-adviser, tech giant or online start-up.

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