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

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Bond battles

The disconnect between different equity markets has given wealth managers pause for thought this year – but it’s fixed income allocations on which they’re most conflicted.  

Last week we took a look at wealth managers who have zero-weighted particular equity markets. There was a degree of disagreement there, but in truth, most balanced portfolio exposures can be boiled down to a simple principle: the vast majority of DFMs hold a sizeable amount in both UK and US shares, with a smattering of other regions making up the rest of their equity budget.

Fixed income allocations, by contrast, share no such common ground. With less than a quarter of the average portfolio allocated to bonds, wealth managers have given themselves scope to experiment with different combinations. 

Some points worth mentioning: A DFM is about as likely to hold a corporate bond fund as they are a strategic bond fund – but very few do both. Almost all of those who shun strat bonds are holding dedicated high-yield vehicles instead. But there’s very little little consistency overall.

To help illustrate these differences, the chart below shows the proportion of discretionaries who are shunning a given part of the bond fund universe.

Much of the data makes instinctive sense: the economic situation means that relatively few buyers are now holding short-duration strategies, while EMD’s recent woes have further dampened interest on this front. But the overarching story is that there’re many ways to skin a cat. After all, even the likes of vanilla government and corporate bond funds are still being ignored by around 40 per cent of all wealth managers.

On the up

More detail was released this morning on the way in which retail fund sales bounced back in April. A net £4bn was invested on the month, with one notable winner being responsible investment funds, which racked up a record £969m in net sales over the period.

There were other notable winners, per the Investment Association stats: tech funds took in £173m, almost 50 per cent more than any other month since records began – a sign that, as we noted last month, professional investors are finally turning to specialist portfolios to take advantage of the rally.

Even Global Emerging Markets strategies posted a small net inflow – surprisingly, the sector remains the only region to have avoided any monthly outflows in 2020 thus far. But it wasn’t all good news for risk appetite. European equity funds bucked the wider trend via a net £160m withdrawal - a move investors may come to regret that move give recent stimulus measures.

And there were also familiar problems for discretionaries’ own portfolios. Other distribution channels rebounded strongly on the month – UK fund platforms, for example, saw their highest net inflows for three years.

Some of this money will have entered DFMs’ coffers via their on-platform models. But their direct business continues to suffer, seeing a small net withdrawal of £93m in April. We’ve noted a number of occasions in the past year that DFMs have been under pressure on this front. As that implies, it remains a persistent problem for the industry, even as risk appetite improves.

Stimulate to accumulate

The European stimulus plans referenced above just got considerably bigger – in Germany, that is. A €130bn fiscal stimulus programme was announced late last night by Angela Merkel. It comes on top of the European Central Bank’s Pepp programme – an expansion of which is expected to be announced this afternoon - and the nascent Franco-Germany recovery fund initiative.

Whatever investors’ scepticism over the relative attraction of European equity markets, it's fair to say policymakers on the continent are repeatedly demonstrating the handy knack of beating expectations. And what’s equally important is the message this package sends to other governments – in Europe and elsewhere.

The size of the initiative, as well as specific measures such as a hefty cut to VAT, raise the stakes for other countries, and will provide a useful benchmark for fiscal stimulus programmes elsewhere. The fight to ensure that economies can lift themselves out of recession as quickly as possible is only just beginning.