DFMs' great strategic bond shake-out; Balance sheet risks loom large for stockpickers
Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.
Forwarded this email? Sign up here.
DIY investing
Discretionary managers’ newfound fixed income forays have been a feature of this newsletter in recent weeks. Seeking solace in government bonds, then opportunities in credit, have been common calls in the industry. But not all bond strategies have been so fortunate.
While investment grade and some high-yield funds have benefitted from increased interest from fund buyers, vehicles that can fish in both these pools have found things harder. Strategic bond funds have seen interest start to ebb slightly, even as the mainstays of their portfolios become more attractive to DFMs.
The average DFM Balanced portfolio had just 3.4 per cent in strategic bond funds as of March 31, the lowest figure recorded by our asset allocation database in the past two years.
In truth, this figure conceals as much as it reveals. Of those discretionaries who do hold strat bonds, exposures tend to be towards the 10 per cent mark. But the proportion opting not to do so is on the rise: 60 per cent of wealth managers now shun the sector entirely in their moderate portfolios.
The sector’s overall performance hasn’t been particularly poor, and many wealth manager favourites - like strategies run by Artemis, Jupiter and Janus Henderson - have done better than average since the crisis began. The stellar returns of Allianz Strategic Bond are unsurprisingly attracting new interest, too. But the sense is that some DFMs are now preferring to target particular parts of the bond market themselves, rather than leaving things in the hands of the go-anywhere managers.
Whether that trend continues should the relatively easy gains seen in April’s rally dry up is another question. An environment in which bond funds have to grind out returns should favour strategic offerings. Unequivocal risk-on or risk-off moves might see buyers turn to sovereign debt or dedicated corporate bond strategies instead.
A fine balance
Be it granolas, luxury stocks, dividend stalwarts or anything else, balance sheet risk is top of the agenda for most stockpickers right now. The past few weeks have been relatively serene from a market perspective, but even so, estimates for when economies might return to normal have started to be pushed further and further back.
Accordingly, earnings season has seen swathes of corporates acknowledge that earnings visibility over the next six or even 12 months is getting no clearer. For those in this boat, having cash on hand is crucial. Companies without this luxury are turning to investors for help – but the window of opportunity may be closing.
As the FT pointed out this weekend, recent UK cash calls have gone relatively smoothly. But those who were “hesitating to ask, in anticipation of a clearer outlook” may now be suspecting they’ve missed their chance.
There are plenty of problems coming down the pipeline for executives at such firms, and not all of them will be able to survive with their reputations – or their companies – intact. That has obvious implications for those in the business of stockpicking, and underlines why balance sheets are in such focus. Taking a long-term view on weaker companies is a difficult ask, given the risk they may not make it through the short term.
For fund buyers, it’s another case of as you were. Strategies that prioritise quality companies and healthy cashflows look like the obvious choices – even if their definition of what constitutes a quality company, and how resilient cashflows really are, may need to be recalibrated in the coming months.
Small comfort
Recent volatility has offered moments in the sun to a handful of different asset classes, from government bonds, to gold, to Chinese equities and, of course, US tech. By the standards of February, March and even April, markets have been uneventful thus far this month.
That will be of welcome relief to allocators still considering how to position their portfolios for a time of unprecedented economic dislocation. They’ll be conscious that trends like those discussed elsewhere in today’s newsletter might not bail them out indefinitely.
To add to the potential confusion, we’ll highlight one unusual winner that’s crept up relatively unnoticed thus far: smaller companies. US, global and Japanese smaller companies funds have started to excel again in May. That’s probably little more than a reaction to the relatively becalmed waters in which investors are floating. It also doesn’t sit squarely with the focus on balance sheets discussed above. Either way, investors will hope this state of affairs persists for a while longer yet.
