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Asset Allocator

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The DFM portfolios going back to basics; April's great allocation indecision

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Back to basics

A demand for more sophisticated investment strategies has undoubtedly helped alternatives providers in recent years, but the support government bonds gave to portfolios in a messy Q4 boosted the case for a return to the humble 60/40 portfolio. It's something that turned heads at the time, and now we're seeing some DFMs take the theory into practice.

Whitechurch recently called time on its positions in Jupiter and Odey’s absolute return funds – the motive being a desire to return to “traditional investing” after those products struggled amid the volatility of Q4.

For the wealth firm's Jonathan Moyes, the focus is now on traditional defensive plays, such as backing duration at a time when central banks are easing off the gas, and no longer risking disappointment through the idiosyncrasies of an alternatives manager:

You’re putting an awful lot of faith in a manager’s ability to have an opinion. With bonds we know that when growth is slowing, long-dated will do well. With the managers the return they’re generating is purely on their view [being correct].

Whitechurch isn't alone in rethinking its positions: Smith & Williamson has revamped its EM exposure by selling Fidelity Emerging Markets. 

This in part creates room to buy Sam Vecht's BlackRock Emerging Markets Equity Strategies, but also stems from a concern that the Fidelity fund was too similar to Hermes Global Emerging Markets, the team’s other core EM holding. At a time when many managers are likely still mulling over what went right and wrong in Q4, other portfolios could be due a revamp.

April indecisions

Markets have become slightly rockier in recent weeks, but this year we've seen little of the investor exuberance that can foreshadow volatility. DFMs have been no exception here, with April's allocation figures showing most are happy to simply continue running winners as markets rise rather than anything more adventurous.

As in March, allocators did pare back exposure to some of the stronger markets. But this has been at the margins rather than anything more radical. Even in areas where average allocations have moved the furthest, this has been the result of a few names bucking the trend.

Once again we've broken out how DFMs are acting when it comes to some of the more notable changes:

Wealth firms were most likely to ease up on US equity exposure: more than a fifth decided to buck the trend by reducing allocations. They're also showing signs of caution when it comes to emerging markets. But it's notable that wealth firms are happier to keep or increase their domestic equity exposure, likely a result of recent valuations.

On the fixed income front, investment grade allocations in our sample drifted back, with DFMs showing signs of favouring sovereign debt.

Elsewhere, wealth firms continued to outsource decisions by placing more money with global equity and strategic bond funds. Here, and elsewhere, we see hints of indecision at a time when many are nonplussed by market moves.

We noted last month that DFMs had allowed cash levels to fall on aggregate for the first time in 2019. This time those erring on the safe side have tipped the balance back, with the average cash weighting ticking up slightly.

For now, many appear to be in a holding period. It’s something that the more eventful movements of May could manage to shake out.

Exchange of opinions

Some good news for ETF enthusiasts: the Investment Association has decided to include the products within its existing fund sectors. Investors will now be able to compare them with the conventional trackers and active funds already in its peer groups.

Is it a positive for DFMs? Arguably it’s a mixed bag: including ETFs among the broader mass of funds does make life easier for those considering the products, even if just as a tactical play on a niche asset. It might even encourage DFMs to increase the presence of ETFs in portfolios – something that’s anemic at best for now.

But it also means more for wealth firms to process when delving through the funds universe, and investors are likely more concerned about how managers do versus benchmarks and active peers than different types of passives. It can also further complicate what is already a bloated funds universe at a time when many discretionaries could do with a simpler life.

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