Asset AllocatorJul 30 2019

DFMs face a new performance poser; The great ballast imbalance

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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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Half full

DFMs’ favourite active funds have achieved mixed results versus rising markets in the first half of 2019, but wealth managers still have plenty to be happy about.

Rising asset prices have made it difficult to lose money so far this year. On top of that there’s still reason to hope portfolios can come out ahead of their benchmarks on an aggregate basis.

For a taste of how things have played out, we’ve assessed the performance of Balanced portfolios from our MPS database in the first half of 2019. As in our assessment of how things stood at the end of March, we’ve also highlighted how the Arc peer group and the MSCI WMA Balanced index have fared over the same period.

Those who saw our previous analysis will notice some familiar dynamics at play. Portfolios are still notching up handsome returns on the back of this year's buoyant markets – the gains range from 6.7 to nearly 12 per cent. But whether this counts as outperformance depends heavily on which benchmark is in use. 

As in the previous assessment, most Balanced portfolios have comfortably beaten the Arc measurement of DFM collective performance. Similarly, all but a few fail to beat the WMA index, which has a significant correlation to the likes of equities.

What’s more striking is how uniform many of the results look. Of the 35 portfolios sampled, all but four deliver something between 8 and 12 per cent. Just more than half of the portfolios analysed are into low double-digit returns.

That's likely a reflection of another development we touched on recently: most DFMs are sticking to similar weightings when it comes to risk assets, allowing them a decent level of participation in recent market gains. A bigger question is what trend they follow when conditions are less rosey.

Bigger ballast

Most portfolios remain equity-heavy but the fixed income side of the equation is still hard to ignore. Government bonds in particular reasserted themselves as a safe haven asset amid the turmoil of 2018, and have rallied hard into this year.

With Jerome Powell widely expected to cut rates this week, sovereign debt looks a more comfortable place than just a year ago, when tightening was still on the agenda. But our data suggests wealth managers remain divided on how useful it can be in portfolios.

Of those DFMs from our database who had dedicated government bond exposure within Balanced portfolios a year ago, 53 per cent have allowed this to increase. Some 40 per cent reduced allocations, with the remainder sticking to the same weighting.

In the case of those with higher weightings, many have simply let allocations drift upward on the back of strong performance. But others have expressed greater conviction: one wealth manager has doubled exposure to 10 per cent over the last year.

Similarly, not all of those reducing weightings are merely taking profits here and there. One name with a position of around 3 per cent a year ago has removed explicit exposure altogether.

What do these differences tell us? For one, the difficulty of assessing government bonds' value has only increased. A rocky Q4 reminded many of the need for portfolio ballast, and conditions now look better for government debt than before - but sovereign debt continues to look a long way from cheap.

At a time of rising markets, decisions like these might not seem immediately pressing. But they could make a big difference come crunch time.

Cracks appear

With US equities once again dragging markets higher, 2019 is proving to be yet another difficult year for those of a bearish disposition. But scepticism continues to be backed, in some corners, by the fundamentals.

That’s one take from a FactSet assessment of Q2 earnings in the US. As analyst John Butters notes, concerns about the headwinds currently facing US companies with global exposure look well founded.

The Q2 blended earnings growth rate - a combination of actual results and estimates for businesses yet to report – came to 3.2 per cent for companies generating more than half their sales in the US. But those generating more than half of sales outside the US suffered a decline of nearly 14 per cent.

The dominance of globally oriented market constituents such as tech names means such problems are difficult to avoid. But it’s confirmation enough that DFMs should take a more nuanced US exposure where they can.