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Asset Allocator

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Multi-asset funds forced to confront new troubles; Rally adds to allocators' confusion

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Mixed signals

Multi-asset funds have had a pretty respectable year, all told – even the most old-fashioned among them. But their relative resilience has come at a cost.

Aside from a brief wobble in March, diversifiers like government bonds helped protect portfolios in their darkest hour. And equity components have done the job since then.

The average fund in the Mixed investment 20-60% Shares sector is now down just 5.3 per cent in 2020, with the typical maximum drawdown kept to a relatively reasonable 15 per cent. DFMs’ own moderate portfolios have fallen 4.7 per cent so far this year, according to estimates from Asset Risk Consultants, and average drawdowns were also a little better than for their unitised peers.

While they may be out of the woods on the capital growth front, the other side of the equation is becoming ever more difficult for diversified strategies. Compressed yields on government bonds have spelled further difficulties for those trying to produce an income.

Of the 567 funds in the main IA multi-asset sectors, just 17 per cent now yield more than 2.5 per cent. And only one in four yields more than two per cent.

What’s more, these statistics are accurate as of April 30, and as usual are on a trailing 12-month basis, meaning dividend cuts are yet to filter through to portfolios. The average UK equity income fund, for instance, still yielded 5.4 per cent as of that date.

Like DFMs, multi-asset managers now have dedicated income strategies, offering higher payouts derived from a wider variety of assets. Yields on these products won’t simply collapse overnight. But investors’ ability to derive any kind of income from a regular diversified portfolio is now very much a thing of the past.

Square one

Last Tuesday we reported on European small caps’ recent resurgence. Since then it’s become increasingly clear the rally is starting lift more than just that particular boat. Germany’s Dax, for instance, is now 11 per cent higher since the start of last week. Even the FTSE has followed suit in recent days, despite some commentators’ suspicion that Brexit will again be a barrier to further gains in the months ahead.

There are still some shoes left to drop. When it comes to investment styles, it’s still business as usual – a slight uptick in performance for value stocks isn’t yet enough to get even the most optimistic of commentators excited.

But the increasingly broad equity rally has led some strategists to return to a different familiar theme: the prospect of a weaker US dollar. And true enough, the greenback has given up some ground over the past few weeks, as risk appetite grows and initiatives like the eurozone’s nascent recovery fund raise the prospect of fiscal stimulus on the continent.

Allocators have been here before: a prolonged period of weakness for the dollar has been one of those market narratives that is constantly predicted but never quite comes to pass. This time around they may take more convincing than ever: the equity market resurgence is looking less like a bear market rally with each passing day - but for many investors that’s just adding to the confusion rather than presenting them with a compelling reason to get involved.

Turning neutral

Some have already been burned by equity markets’ lopsided performance this year. The Witan investment trust yesterday admitted its own allocations had resembled something akin to “a reverse Midas touch”, courtesy of its overweight to the UK and underweight to the US.

That’s an unusually frank acknowledgement, in part borne out of a switch in benchmark at the start of 2020. Chief executive Andrew Bell says the trust was deliberately slow to shift its allocations to match its new index. That’s a decision with which most allocators will have some sympathy –after all, blindly following a benchmark is of little value to providers, regulators, or investors.

Looking ahead, the trust isn’t giving up entirely on either its UK overweight or its US underweight. But it is shifting its style preference, searching for more adaptable style neutral managers rather than those tilted towards value stocks. Even those who like to stick to their guns are struggling to do so when it comes to value nowadays.

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