Fixed facts

If heavy equity exposure is currently difficult to avoid for most moderate investors, DFMs can at least be more circumspect when it comes to fixed income. But wealth managers can’t escape the tricky decisions: good value might be hard to find in both government bonds and credit, but the asset class's diversification benefits are still pretty strong. That means many buyers are still torn between fixed income and alternatives when it comes to balancing their portfolios.

So after breaking down equity exposures in Balanced portfolios, today we turn our attention to DFMs' overall bond weightings. The spread of allocations is displayed below:

With the typical wealth manager sticking to 50 to 60 per cent in equities, there's limited room for manoeuvre when it comes to other assets. Less than a third of the DFMs in our sample have more than 30 per cent allocated to fixed income, though all but one have at least 10 per cent.

That said, with DFMs divided over how exactly to diversify their portfolios, there's a disparity in their bond weightings that stands in stark contrast to the uniformity seen in equity allocations.

This shift also hints at some big differences in how individual portfolios have performed of late, given the renewed rally for fixed income of all stripes in 2019. Standing out from the crowd, for better or for worse, will be a little easier this year.

Tech flight

Given the renewed 2019 rally in tech stocks, it’s hardly surprising that fund managers think backing the sector remains one of the most crowded trades in the market.

There’s less of a consensus on whether those fortunes can continue. Analysts at FactSet, who predict a US earnings recession is on the horizon, think technology company earnings will be leading the slump this quarter. They predict a 7 per cent year-on-year drop, a fall matched only by that forecast for materials companies.

We should emphasise that such analyses of the tech sector nowadays exclude the Fang stocks: the index rejig last year shifted Alphabet and Facebook to the communications cohort; Netflix and Amazon were already absent.

Either way, it’s hard to find evidence that UK-based investors are taking profits just yet - outside those discretionaries seeking to diversify their US equity exposure. 

Net flows into the IA Tech & Telecoms sector have been rising again in recent months. In absolute terms these figures are small, but pound for pound they indicate the average tech fund is now taking in more money than the typical fund in any other equity sector.

In the investment trust world, however, it’s a little different. As brokers Stifel point out, Polar Capital Technology is now trading on a discount of 9 per cent, its widest level in three years. Underwhelming short-term returns may be partly to blame in that case, but even Allianz Technology - still among the better performers - is on a discount of around 2 per cent. The closed-ended universe holds a particular attraction at the moment for who think the tech party can continue undimmed.

Recession risks

Concerns that the UK is nearing a recession have been on the rise lately, so this morning’s considerably better-than-expected retail sales numbers will be a boon to the optimists. The hardy UK consumer might just be able to prop up domestic growth rates once again - particularly now wage growth is showing its first real signs of life in more than a decade.

Talk of recession further down the line will continue as long as a no-deal Brexit remains on the table. The cheerier retail figures have been somewhat overshadowed by the Office for Budget Responsibility’s report on the possible consequences of no-deal, which predicts a £30bn annual hit to public finances per year. It says this is a stress-test scenario, rather than a worse-case outcome. 

It’s clear that the real moment of truth for the UK economy is lurking just around the corner. But for now, its existing engine is still holding up reasonably well.