Asset AllocatorApr 29 2020

Discretionaries' equity exposures plumb new depths; Whipsawing markets' unlikely winners

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

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

Forwarded this email? Sign up here.

Crunch numbers

From allocators’ perspective, it can often feel like there are decades when nothing happens, and weeks when decades happen. That wasn’t quite the case in the first quarter of 2020, but the market turmoil did prompt a significant change in their portfolios’ aggregate positioning.

We’ve already discussed the shift from equities to fixed income, not least for those who spied opportunities in credit. And our asset allocation database now shows the average allocation to IG debt rose from 8.2 to 9.7 per cent on the quarter. But the latest figures also emphasise that corporate bonds weren’t the only beneficiary. In total, the average equity allocation fell by five full percentage points over the quarter, down to a record low of 52.8 per cent.

Some of this is a reflection of market falls, but the majority of the move was down to active allocation decisions on DFMs’ part. For evidence, look at the increase in cash. Last week we reported initial figures that showed many discretionaries were running cash positions of 8 per cent or more. Today’s updated statistics confirms that weightings of this size are now the norm: the average has risen from 5 per cent to 8.5 per cent in a single quarter.

That said, the split we identified last Thursday is still partially apparent: one fifth of firms in our database, most of whom were running elevated cash positions at the start of Q1, had reduced these positions by the end of March. Unlike the rest of their peers, they used this money to add to equities as well as fixed income.

On a regional basis, it was typically UK equities that were topped up. But even this group of cash-rich DFMs pared back their US allocations. And that was in keeping with the industry as a whole: wealth managers tended to take profits on their US winners, but largely maintain their UK exposure. As April draws to a close, this tactic has yet to work. Allocators will hope the valuation discrepancy soon begins to shift in their favour.

Winners and losers

At this point, the above dynamic is well known by wealth managers. US tech remains more or less untouchable at the top of the performance charts this year, in markets both good and bad. Commodity-heavy indices like the UK have suffered the opposite fate. But with April drawing to a close, it’s worth comparing those good and bad times in a little more detail.

It’s not just tech that’s displayed a surprising amount of resilience this year. Japanese shares have done the same – albeit for very different and likely more transient reasons. In March’s difficult markets, yen strength gave Japanese indices a boost. In April’s calmer waters, this week’s easing announcement from the Bank of Japan has helped give stocks another leg up.

The result is that Japanese small caps have flourished: the sector shed just 2.9 per cent in sterling terms in March, putting it ahead of tech in the “unusually defensive” stakes. A 12 per cent rebound in April means such strategies have now outperformed all other asset classes since the start of last month.

Add in tech and gilts, and the three make an unlikely trio at the top of the performance charts over that period.

Year to date the picture makes a little more sense: smaller companies strategies of all stripes sit near the bottom of the rankings. But the sector at the foot of the table will continue to trouble wealth managers: UK equity income ranks as the worst performing area since the start of 2020 – and, more pertinently, on both a one and three-year time horizon, too. That will bring the reach-for-yield risks we discussed yesterday into even sharper focus for selectors.

Transfers out

Were wealth managers in any doubt over the current direction of travel on DB transfers, news from the Pensions Regulator this morning should provide another corrective. The industry is to tell scheme members that transfers are likely inadvisable – for want of a better word – during the coronavirus pandemic. As we’ve previously mentioned, that removes one source of inflows for DFM portfolios.

When the flow of easy money dries up, preserving business often boils down to relationships. And separate data revealed today confirms that, when it comes to the financial adviser market, those relationships are focused on an ever-dwindling band of big players. Allocators will be trusting sales teams to forge the right connections in the months ahead – and to get their foot in the door where necessary. Sales teams, for their part, will be emphasising the role played by performance. And heads of business will be considering whether their price point is competitive enough for a challenging market.