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

Forwarded this email? Sign up here.

The ground starts to shift

After sitting on their hands in April, wealth managers proved more willing to make changes to their portfolios last month. Our asset allocation database suggests a greater number of wealth firms started buying into the rally in May.

And while there were some commonalities, those starting to tweak their allocations opted for a variety of different options as they positioned for the next phase of the pandemic.

Some norms are still firmly in place: UK equities continued to fall from favour despite investors showing little inclination for a renewed flight from risk assets. Just one solitary DFM in our sample upped UK weightings on the month – the rest either stayed put or sold into the equity market rally. We'll explore these changes in more detail tomorrow.

By contrast, appetite for other equities continued to rise, and US shares were again a particular area of interest. And fixed income positions were also tilted in favour of riskier assets, as the chart below shows.

Some discretionaries are still cautious on the fundamental attractions of high yield. But as the weeks go by and spreads continue to tighten, more allocators are getting on board: the average weighting crept up to the 3 per cent mark last month.

Bonds remain a point of differentiation for most wealth managers. Most of those holding conventional government debt opted to shift some of this money elsewhere in May, but there was no consensus on where to go. Yes, high yield and investment grade funds are popular. But the month also saw an uptick of interest in short-duration and index-linked strategies. As of yet, however, greater risk appetite hasn’t extended to more exposure to EMD.

A final note on cash: while weightings here fell once again, they were driven by a minority of cases. The vast majority of wealth firms again maintained cash positions at prior levels – and a couple even hiked exposures once more. More proof, were it needed, that caution is still the watchword.

Time for a reset

A slow and steady approach might be advisable on more than one front this summer. The dividend drought facing investors is only in its early stages, and some will be pushing out along the risk curve in search of higher payouts. For professional fund selectors, the need to provide their own clients with a reliable income stream creates incentives that can be hard to resist.

But the pandemic does at least provide a logical reason for a reset. Selling this approach may be tricky, but restarting from a lower level of income will at least prove much easier to sustain in the medium and long-term. It also opens up the possibility of turning to some less heralded sources.

One is US equities: the relative resilience of some US sectors will also aid their dividend payments, even if yields are typically much lower than in other regions. Just 10 per cent of US companies have cut dividends so far in this crisis, according to Kames’ global equity income team, aided by the fact that companies were able to slash buybacks as a first port of call.

But looking further afield than hard-hit UK or European payers might also mean income itself is less of a priority.

One growth-focused investment trust, BMO Global Smaller Companies, has this morning increased its dividend payout for the fiftieth consecutive year. Such examples are few and far between, but they do emphasise that income can come from unlikely areas. That doesn’t even have to mean dividend payers: Terry Smith has long advocated using capital growth to fund income payouts. It’s unlikely that DFMs will be filling their income portfolios with growth funds any time soon, but the dearth of lower-risk options might mean this approach is given greater consideration in future.

A favourite mistake

A significant shift in UK monetary policy was announced this morning by Bank of England governor Andrew Bailey. The former FCA head said that the central bank should unwind its QE programme before raising rates, a reversal of previous policy and a firm indication that lower for longer is back in the UK as well as US.

But the governor’s comments elsewhere were slightly more concerning  - if only for the way they may be interpreted. Mr Bailey said the government may have “struggled to fund itself in the short run” if the BoE and other central banks hadn’t intervened when bond markets locked up in March. This liquidity event is now in the headlines as an issue of solvency. Portraying government finances in this way – the renewed focus on UK government debt levels is of a piece with this analysis - doesn’t suggest that lessons of the past decade have been learned.

Monetary stimulus cannot do all the heavy lifting for the economy. Taxation should have a role to play in the recovery, but so too should a government that finally takes advantage of record-low gilt yields. Further fiscal consolidation, by contrast, would surely prove counter-productive.