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Asset Allocator

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Diversified portfolios face up to the passive threat; A temporary pause for manager moves

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On track

Once again, passives have emerged as a beneficiary of the current crisis. That’s not the obvious conclusion to draw, given the way indices headed south and ETF behaviour returned to the spotlight last month. Yet neither of these events has dented retail investor confidence.

February retail fund sales figures gave an early indication of this resilience. Tracker funds took in a net £1.7bn on the month, despite a general flight from equities. Detailed data for March is yet to be published, but early estimates from Morningstar indicate the same trend was in evidence here, too.

Active funds’ ability to protect on the downside has been severely tested in recent weeks: of the major equity groupings, only the Europe ex-UK sector has beaten the benchmark so far this year. As we showed last week, the smaller band of strategies from which DFMs pick have done better than the average equity fund. But there were plenty of poor performers here, too. Passives face no such pressure to perform.

The multi-asset world has also thrown up further success stories for the low-cost advocates. Developed market government bonds have reasserted their role as true diversifiers in 2020 – their brief mid-March wobble now all but forgotten – and that’s been of benefit to the old-fashioned asset allocators.

Vanguard’s LifeStrategy funds have beaten their equivalent active multi-asset strategies since the start of the year. They’ve narrowly done likewise when pitted against DFMs’ own portfolios, according to Arc estimates for the first quarter.

But passives haven’t got everything right on the allocation front. The LifeStrategy 100% Equity offering, which hasn’t been able to fall back on bond exposure, has underperformed against most peers. That’s due to a lower than average US allocation and a higher UK equity weighting. The divergent performance of these two markets doesn’t look like changing any time soon – and that offers a glimmer of hope for wealth managers increasingly forced to compare themselves with lower-cost rivals.

Press pause

Given everything that’s going on, it’s perhaps unsurprising that fund manager move season has been pretty quiet this year. Bonuses are now in hand, but there have been fewer transfers than usual for fund selectors to deal with thus far. Yes, two managers popular with DFMs have switched sides – Nick Clay and co from BNY Mellon to RWC, and Andrew Swan from BlackRock to Man GLG – but these are exceptions rather than the rule.

With the list of potential recruiters dwindling, opportunities to jump ship will be less frequent than they once were. On the other hand, volatile markets increase the odds that a new portfolio will be launched at something close to market lows. That's never a bad prospect for a manager seeking to rebuild their following at a new home.

But there’s another manager-move trend that could be worth watching for fund buyers. Janus Henderson announced earlier this month that Charlie Awdry would be taking a career break. For managers who’ve ridden a decade’s worth of healthy returns, that may look an enticing prospect. Working from home in difficult markets, at a stressful time for family life, isn’t the most attractive option at the moment.

It’s true that many fund managers will relish the challenge. But others will think this might be a suitable time to pause – or, if they’re experienced campaigners, a good opportunity to call it a day. A similar trend was observed around the time of the financial crisis, after all.

Many new reputations will be built around the volatile markets. But a few older ones may be thinking again about prolonging their own careers for much longer.

Split in two

As we discussed last month, risk-rated portfolios have largely done their job so far this year. Portfolio stresses haven’t ripped up DFMs’ risk bands: aggressive portfolios have fallen proportionally more than moderate offerings, which in turn have lost more than cautious strategies. The spectrum of returns has largely remained stable.

Historically, it’s been moderate strategies that tend to amass the most assets for wealth managers - a goldilocks portfolio for a goldilocks market environment, you might say. But there’s reason to think that may change in the short-term. Clients could well start splitting into two more distinct groups: those who are hunkering down, and those who think there are now real opportunities out there. DFMs shouldn’t be surprised if advisers end up reassessing clients' risk appetite – and risk tolerance – as a result of the recent volatility.  

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