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Advisers double down as DFMs hang back; Dark times reveal a surprise equity overweight

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Advised drawdown

New figures detailing how adviser portfolios were positioned at the start of this year will look remarkably familiar to DFMs - with one significant exception.

Natixis IM’s latest portfolio barometer shows the typical adviser’s moderate portfolio had 51 per cent in equities at the end of last year, with 21 per cent in fixed income, 17 per cent in alternatives and real assets, and 4 per cent in cash.

As the chart below shows, those allocations mostly mirror discretionary managers’ own positions. Such is life in the age of risk-rated strategies. The exception is allocation, i.e. multi-asset, offerings. Advisers’ portfolios hold 7.7 per cent in these funds - meaning their dedicated bond and equity exposures are lower than DFMs’ own.

That wasn’t necessarily the wrong decision. Because bonds and equities performed well yet remained relatively uncorrelated with one another last year, the average adviser’s moderate portfolio outperformed the UK equity market, Natixis notes. Every single one of these portfolios also had a higher Sharpe ratio.

And within these portfolios, advisers were keen to avoid using their multi-asset bets to replicate their wider portfolios. Allocation funds accounted for 7.7 per cent of the typical portfolio at the start of the year. But Natixis points out that moderate multi-asset funds saw net outflows last year, in contrast to cautious or aggressive offerings. The suggestion is that advisers have been focusing on conviction positions.

But if 2018 was the year that nothing worked, and 2019 was the year that everything did, then 2020 risks a return to the former state of affairs. There are renewed signs of stress in bond markets this week.

The sharp sell-off in government bonds yesterday has been attributed by some to stimulus plans now being enacted. Yet while equities rallied on that news, credit has remained under pressure. Clearly, there’s still a long way to go this year - though as volatility rises to record levels, that may not be much solace for those trying to maintain a balanced portfolio. Next week we’ll take a closer look at how discretionaries’ own attempts have fared so far in 2020.

Dark clouds

Bank of America’s fund manager survey is as gloomy as you’d expect this month. Global growth expectations have fallen off a cliff, cash weightings have seen the fourth-largest monthly jump in the survey’s history, and equity allocations have slumped. 

There’s even a corrective for the contrarians: the bank’s analysts note that the survey’s ‘contrarian buy signal’, duly triggered this month by the above datapoints, has form for being triggered too early - July 2008, for instance.

So it’s little surprise that healthcare stocks have overtaken tech as the most favoured sector, or that investors are turning back to quality stocks and bond proxies - if they ever left them. But there are still one or two oddities in the data. 

The survey throws up an interesting datapoint for those who think sentiment towards passives is about to go into reverse. Just 6 per cent of allocators say they intend to cut their exposure to ETFs over the next year, compared with 23 per cent who say they’re planning to increase weightings. That position has barely changed since the start of the year. 

And while the proportion of allocators saying they’re overweight equities suffered the largest monthly drop ever - from a net 33 per cent overweight to a net 2 per cent underweight - but EM equities remained the most favoured region for the fifth consecutive month. 

Investors may think the ‘first in, first out’ notion applies to the virus, but set against this are commodities’ continued falls and the continued rise in the US dollar. The dollar index has surged in the past couple of days, amid concerns that funding is tightening up around the world. That’s also put plenty of pressure on EM currencies. All in all, it doesn't bode particularly well for developing economies, whatever allocators think.

Material uncertainty

The latest set of property fund suspensions look the least surprising of the lot, given current market conditions. UK physical property funds had performed reasonably well this year, but a lot has changed in the past couple of weeks. The relevant catalyst this time, however, isn’t investor redemptions.

All four of the managers to suspend in the past 24 hours - Kames, Janus Henderson, Aviva and Aberdeen Standard Investments - have cited not outflows but independent valuers’ inability to accurately price their portfolios

FCA rules due to come into force this September require funds to automatically suspend if there’s uncertainty over the value of 20 per cent or more of their assets. 

With funds effectively adopting this approach ahead of time, it no longer matters how much cash they hold as a buffer - and that’s why sector-wide closures, more widespread even than those seen in the aftermath of the EU referendum, are now likely. And given a let-up in economic uncertainty isn't likely any time soon, these gatings could last much longer than in the past.

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