Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.

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Toughing it out

It’s not getting any easier for allocators. The Fed has stepped in again this afternoon to help stem equity losses - but the FTSE continues to hover around the 5,000 mark, and there’s still more than a week of March left for investors to endure.

For wealth managers who pride themselves on outcomes rather than relative performance, that’s hard to take. But for those who run model portfolios, there’s still one type of relative return that commands attention.

The era of risk-ratings means that adviser clients - and regulators - still expect MPS ranges to perform in a certain way. A defensive model 2 should lose less than a moderate model 3, which in turn should protect capital better than model 4, and so on.

This month, one in which bonds as well as equities have often moved in unusual ways, will be a big test of those ranges. But DFMs have already had to deal with a sharp shift in risk sentiment at the end of February. And from models’ perspective, it’s so far, so good.

Our analysis of 20 different discretionary model portfolio ranges indicates that every one performed as it was supposed to last month - insofar as losses gradually scaled up in line with risk ratings. That’s the case for average losses, as displayed on the chart, but also for individual ranges. Not a single defensive portfolio underperformed a more risk-on equivalent in February. 

As the chart also shows, the gaps between different models were also remarkably consistent, in aggregate at least. 

But these consistencies weren’t always replicated in benchmarks or peer groups. The IA’s Mixed Investment 40-85% Shares sector, for example, lost the same amount - 4.7 per cent - as the ostensibly riskier Flexible Investment group last month. Discretionaries will hope they don’t fall foul of similar discrepancies once March’s figures are finalised.

Bond breaches

The pressures being faced by money market funds in recent days are an unwelcome evocation of the financial crisis years. And stresses in bond markets have continued to rise, too. 

The US remains at the epicentre of many of these issues - a revealing blog from TwentyFour Asset Management last Friday detailed just how difficult it's become to trade even Treasuries at the moment. Corporate credit has also come under particular pressure. Outflows from fixed income funds globally totalled $109bn last week, according to EPFR, with $55bn coming out of investment grade mandates alone. 

Even subprime mortgages are back in focus: the $2.3bn AlphaCentric Income Opps fund shed 30 per cent of its value last week, and is now seeking buyers for more than $1bn of US mortgage bonds, per the FT.

These issues could well be aided by the Fed's latest moves, but stresses aren't confined to the US. In Europe, central banks’ own commitments should similarly help support credit on the continent - but that hasn’t been enough to prevent dozens of Nordic high-yield funds from gating in recent days. 

Could the same thing happen over here? It’s not yet clear whether money has been leaving UK bond funds en masse this month. But figures from Numis suggest many equity strategies, at least, have avoided the major outflows that are being seen across the globe. The typical UK equity fund, it says, has seen just 1 per cent of assets withdrawn since February 19.

It isn’t just redemptions that fund selectors need to watch for. Last week’s string of property gatings show that “material uncertainty” over valuations can be enough to prompt suspensions for illiquid strategies. In Scandinavia there have been similar concerns over how to price high-yield bonds. But a lack of significant redemptions from UK bond markets - if they are indeed mimicking their equity cousins - would be one plus point amid a series of minuses for bond markets.

Timeline trade-offs

The scope of the current crisis is such that liquidity mismatches are being pushed back down the regulatory agenda - even as they return to the headlines via episodes such as those property fund suspensions.

The Bank of England said last Friday it had postponed its examination of 300 open-ended funds, a move that will have a knock-on effect on the FCA consultation that was to have followed. 

The timeline for this investigation was already rather hazy: the Bank’s next bi-annual Financial Stability Report was not due until July in any case. That suggests any concrete findings won’t now be published until December at the earliest - pushing resultant FCA action into 2021. Wealth managers will hope that no more glaring examples of illiquidity issues will have hit the headlines in the interim.