Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.
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The mood in markets is a little darker today, following on from a weekend in which signs of a further uptick in virus cases continued to emerge. That’s taken the gloss off last week’s EU recovery fund breakthrough – though in truth, that gloss had already started to disappear on Friday.
Some of this week’s market reaction, however, looks much the same as it did when the EU summit concluded last Tuesday. Gold remains very much on the up, and the dollar continues to stumble against the likes of the euro.
Strange as it may sound, it’s arguably a lack of fiscal stimulus that has got investors nervous about the greenback: the concern is that the next round of contingency measures won’t prove enough – particularly as a number of states are struggling with renewed Covid-19 concerns.
The problem for allocators, as one commentator puts it, is that “if you’re negative on the dollar, what are you positive on?”
One obvious answer might be Europe – but there are big risks to that strategy.
The first is that investors have been punished in the past for turning away from the US. In a scenario where the US economy continues to struggle, there will be little hiding place for equity investors.
The second, related issue is that European indices still pretty cyclical in nature – and therefore subject to lurches in risk-off sentiment like that seen on Friday. The recovery fund may have prompted some wealth managers to nudge up their European positions, but given the global context, this isn’t another “whatever it takes” moment just yet. A major rethink of equity exposures remains a long way off for DFMs.
Head above water
With gold still on a tear, wealth firms will again be considering exactly how their defensive and alternative allocations stack up. Model portfolios have utilised a variety of asset classes on this front in the past couple of years - with varying degrees of success.
We’ve discussed in detail how absolute return and hedge fund preferences have evolved over that period - one principle direction of travel being away from multi-asset AR strategies and towards more specialised hedge fund remits. But there is one fund straddling this divide that’s started to prosper of late, and attract more attention from DFMs in doing so.
Neuberger Berman’s Uncorrelated Strategies vehicle has been one of the winners of 2020 thus far, living up to its name by continuing its relatively serene progress through February, March and beyond. The fund is now among the most popular alternative picks among UK discretionaries, according to our fund selection database – though to their credit, many wealth managers were already making use of it prior to its Q1 successes.
The NB fund aims to mitigate that risk via a fund of hedge funds approach – a structure that’s not really found favour with selectors for a decade or more. In this case, however, Neuberger has found a way to limit the costs inherent in this structure: its underlying fund managers are remunerated on a performance fee basis, meaning costs are lower when the strategy doesn’t perform. Many asset managers have found fund buyers have a limited appetite for fee innovation. The success of Uncorrelated Strategies suggests there is still room for different models to prosper.
Lower for longer
A record proportion of the global bond market – 86 per cent – traded at yields of less than 2 per cent as of the start of this month, according to ICE Data Services. That highlights the pressure facing allocators trying to construct balanced portfolios, and there’s unlikely to be any respite in the near future. As issuance starts to dry up following a record period, the summer shutdown in markets is once again around the corner.
That suggests little scope for a meaningful spike in yields in the near future – not that global economic performance suggests otherwise.
Bond fund managers will once again be content to sit tight, this time perhaps trusting in the Fed backstop as much as their own credit analysis. Those who populate portfolios with these strategies will have little choice to do the same. After all, both government bonds and credit have proven their worth again this year. Those gains may have gone, but a reversal in fortunes isn’t necessarily about to emerge, either.