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Wealth firms' alternative asset carve-up; US funds await a different kind of parachute

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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An alternative divide

The rise of alternative assets has, in theory, given DFMs many different ways to eke out returns beyond traditional markets. And as the range of alternative funds used by discretionaries grows ever wider, some are finding the need to categorise them more precisely.

The proliferation of alts offerings comes at a time when producing income has become more important than ever before. So it’s no surprise that wealth managers are splitting their weightings along these lines. 

City Asset Management is one business doing just that in its bespoke portfolios. It has divided up its exposure by breaking out alternative income strategies from other funds - the likes of infrastructure and environmental assets. The firm has also shifted long/short funds from its equity bucket to the broader alternatives category.

For City’s James Calder, the reshuffle should avoid the risk of investment managers inadvertently “getting too far into bed with one subset of an asset class”.

It isn’t the only firm taking a more granular view of alts and bringing yield to the fore. Waverton has taken a more definitive approach, dividing its exposure into two separate unitised fund of funds strategies: an absolute return portfolio, and a real assets fund that it has also made available to external investors

The wealth manager says the split will make it “better able to tailor the risk and return characteristics for each of the strategies”. 

Using unitised strategies, or operating off-platform bespoke portfolios, gives discretionaries the flexibility they need when it comes to alternative investments. But circumstances are more constrained when it comes to other portfolios.

Mr Calder notes that a lack of fund availability on some platforms “is a stumbling block”, but says the firm can replicate some of its closed-ended exposure to a degree. We’ll be taking a closer look at this issue in the coming weeks.

The Washington consensus

As UK fund selectors ponder the repercussions from events in Oxford, investors elsewhere are fixated more than ever on events in Washington. And it’s not just presidential pronouncements that are defining market moves: anticipation of a pivot in monetary policy has also turned all eyes back to the Federal Reserve.

Comments from Jerome Powell and colleagues over the past few days, the clearest suggestion yet that the central bank might cut rates this year and thereby provide a parachute for equity investors, have helped temper the current equity market wobble. 

For all the trade war worries about other sectors, it was tech that had again borne the brunt of this slide in sentiment: the Nasdaq briefly fell into correction territory on Monday. 

And the latest sell-off was also driven by actions in the US capital. Reports that the US Department of Justice is preparing an antitrust investigation into Google were taken as another signal that the regulatory tide is turning for the sector.

The scope of that probe, and the likelihood of others emerging, is a familiar problem for investors. Over the past decade the focus on fundamentals has been superseded by the need to keep up with political risk. And while the impact of those risks can often be overstated, the continued deterioration in US trade relations shows that these issues do matter, even to long-term investors.

But there is one aspect of Washington’s influence that may have been overplayed more than most. It’s received wisdom that quantitative easing has distorted government bond markets around the world, and given bond investors a soft landing of their own.

Yet, at a time when this assistance has all but ended in the US, yields are falling faster than ever. In this light, it looks like the search for safe havens, and indeed continued deflationary pressures, have been the true determinants of sovereign bond prices over the past decade.

Hands on

It’s not been the best week for active management’s reputation, but some influential figures are just starting to warm to the concept. Unfortunately for professional investors, the term has taken on a rather different tenor in the hands of one US presidential candidate. Elizabeth Warren - the senator currently third in the polls in the race for the Democratic nomination - yesterday called for an “actively managed” US dollar policy in order to help preserve domestic jobs.

Ms Warren may not win the nomination, but touting such a policy may catch the ear of another noted strong dollar critic: the current president. As the lengthy US election season moves into view, intervening in currency markets might not prove beyond the pale for Donald Trump et al. Far-fetched it may sound, but it would take little more than a tweet to get investors thinking again about an end to dollar strength, and how that may affect their portfolios.

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