Asset Allocator will be taking a short break over Christmas and the New Year while its co-creator goes away on honeymoon. We hope you've enjoyed our newsletters in 2019 - see you in January.
Marks out of 10
In this, the final Asset Allocator of the year, it feels like an appropriate time to look at some 2019 scorecards. Our analysis of full-year figures will follow in early 2020 - the good news, from DFMs’ perspective, is that it will be less of a post-mortem and more of a fond look back this year.
Today we’ve examined the performance of portfolios' underlying fund holdings in a little more detail. But similar to the analysis we conducted last week, there are signs that all isn’t quite so rosy under the surface.
Last Wednesday we examined how the 10 most popular DFM picks in certain sectors had done against their peers over both three years and 12 months. The latter set of figures did give some cause for concern - and the chart below backs that up:
This time, we’ve examined how discretionaries’ picks have done against their benchmarks - and whether the average DFM selection has a better chance of beating the market than an active fund picked at random from the wider IA sector.
The figures suggest the jury’s out on that question this year. Because while wealth managers’ favourite funds have done a better job of beating benchmarks in Europe and Asia, they’re lagging behind in the UK and the US.
On home shores, this isn’t a big problem. Seven out of 10 selections have beaten the FTSE All Share; that’s slightly behind the 73 per cent of all UK growth funds to have done so, but both figures are healthy from active fund selectors' perspective.
In the US, however, it’s a different story: just a third of all funds have beaten the index in 2019, and that falls to a fifth when looking at DFMs' 10 favourites. Beating the benchmark may prove easier if tougher times are coming for US equities - but those looking for another solid year might want to look again at passive options.
One thing that has worked very well for diversified investors this year is the traditional 60/40 model. Rumours of its death have, for now, been greatly exaggerated. Another stellar year for both bonds and equities has left old-fashioned investors sitting on sizeable gains for 2019.
At this point, it’s almost obligatory to state that next year may be different. Fixed income markets, in particular, will become harder to navigate. So goes the consensus that’s taken hold at the end of almost every year this decade.
Still, it can be hard to argue with the numbers, and some figures from Amundi do put bonds in a particularly unflattering light at the end of the decade. In global aggregate indices, average duration is at all-time highs and average yields are again on the verge of all-time lows.
This problem is, unsurprisingly, particularly pronounced in Europe, which alongside Japan has long been home to the most obvious examples of negative-yielding debt.
The solution offered up by Amundi is again similar to those that have been ventured in years gone by: as the hunt for income continues, investors will head up the risk scale - and it’s here in particular that they need to be selective. That means private debt as well as public markets - and the asset manager notes that European private market options, like mezzanine financing and LBO deals, do in this case outstrip their US equivalents when it comes to yield.
Terminology like the above will bring to mind painful memories of the financial crisis, and a continued reach for yield won’t exactly inspire long-term confidence in the stability of the financial system. But with monetary policy remaining loose and allocators tasked with delivering income to their investors, a further push in this direction looks inevitable.
A new focus
We end the year, fittingly enough, on a familiar subject for 2019: the future of Neil Woodford’s portfolios. This morning brought the news that Aberdeen Standard Investments has been appointed to take over management of Woodford Income Focus, suspended since October.
The appointment of Thomas Moore and team may look a strange one, given the pool of available options and the manager's current underwhelming performance. But consider much of this performance is down to a preference for domestic stocks.
Some observers might see his installation as a foolhardy attempt to time the market, now that such shares are coming back into favour. Equally, there's an argument in favour of prioritising a manager whose portfolio has more room for upside in future - rather than a quality growth performer who's already banked several years of excess gains.
What swung it, in the end, may just be that a portfolio of domestic stocks is arguably what original Income Focus investors hoped they'd get from the strategy. It's a little too late to reset the clock, but the decision seems reasonable enough as we head into 2020.