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Asset Allocator

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Wealth firms' pre-sell off positioning under the microscope; Hedgies restore some faith

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Into the storm

First estimates of the extent of DFMs’ February losses are in - and they’re not as bad as some clients may have feared.

Figures from Arc suggest the typical wealth manager Balanced portfolio shed 2.8 per cent last month. Not to be shrugged at, but at the same time broadly comparable with December 2018 losses, and better than October 2018’s dip of 3.2 per cent.

Why was price action relatively subdued? While equities fell more steeply in February than in either of those two months, diversifiers like government bonds performed even better than during past periods of stress.

The flip side is that the more aggressive portfolios suffered more seriously: Arc’s equity risk private client index fell 5.4 per cent, worse than the 5.3 per cent in October 2018.

But when it comes to allocations, most discretionaries moved into February without having rocked the boat in the preceding weeks. Our own asset allocation database shows the proportion of DFMs who changed model portfolio allocations in January sat at a record monthly low. Just one fifth of wealth managers made changes on the month - as a result, average allocations at the start of February looked as follows:

A common theme among the small contingent of movers was putting cash to work: so much so that the average cash position did fall on the month from 5.4 to 4.4 per cent.

In terms of risk assets, beneficiaries of this reduction were EM and European equities - two areas where losses haven’t been as bad as feared. But the shifts weren’t purely risk-on in nature: money was put into bonds as well as equities, albeit the former were often of the high-yield variety as well as sovereign debt strategies. DFM portfolios fared as well as could be expected last month - the question now is whether ongoing coronavirus concerns prompt a broader rethink of allocations.

On the mend

Hedge funds are arguably another factor behind wealth managers' reasonable performance last month. Lyxor’s cross-asset research team, for one, noted yesterday that hedgies have successfully passed their “crash test” in recent weeks.

Lyxor’s own figures show its Ucits peer group fell 1.8 per cent between February 23 and February 27. That’s far from matching government bonds’ returns, but does represent an improvement on the pretty poor performance achieved during the last drawdown of note.

A glance at February performance figures for individual funds does reveal a couple of flies in the ointment - among DFMs’ favourites, AHFM Defined Returns underwhelmed with a loss of 6.5 per cent - but on the whole the sense is that hedge funds weren’t caught out this time around. Even much maligned multi-asset absolute return funds did well: favourites of old from the likes of Invesco, Aviva and Aberdeen Standard Investments were broadly flat on the month. 

None of this may be enough to bring discretionaries back to the table, however - particularly as their fixed income positions are still doing the job. Strategic bond funds, whose high-yield components mean they aren’t as defensive as other bond portfolios, shed an average of just 0.1 per cent in February: that performance wasn’t matched by many hedge funds or absolute return portfolios at all. But these improved performances are perhaps a reassuring sign that there’s still more than one way to diversify.

Seven up

An FT FOI request has revealed seven UK funds breached the 10 per cent unlisted stock limit between summer 2017 and this winter - not including Woodford Equity Income.

It took some time for the regulator to disclose the figure, and individual fund names weren't revealed. Certain examples will be obvious nonetheless, and have been on fund selectors’ radar for a while now. But while the overall number is low, it’s arguably still one or two integers higher than wealth managers might have expected.

The increased scrutiny now given to liquidity issues means buyers will be fully aware if their selections are still hovering near these limits - though that same scrutiny makes such tactics less likely nowadays.

The ‘trash ratio’ is unlikely to be changed in the near-term, given it’s a Ucits rule. And even domestic changes, such as those now being investigated by the Bank of England, remain many months off. So breaches like this aside, it’s down to the industry to self-police liquidity issues in the meantime - and fund selectors will be aware they’re at the forefront of this effort.

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