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Far from home
From an investment perspective, April to July has proven better than most wealth managers could have expected. A recovery for (most) risk assets have left portfolios looking in decent shape. And while there’s more than enough uncertainty over the economic outlook, investor preferences have largely stayed the same over the entire period: US equities, credit, and a willingness to add some risk at the margins.
So the chart below, showing how DFMs’ moderate portfolio allocations changed over the second quarter, largely relates shifts that happened in April or early May. As we discussed earlier this week, discretionaries have, in the main, been reticent to make any further moves since then.
But there are signs of life starting to emerge: in recent weeks, European equities’ minor renaissance has encouraged some to up allocations, and others to return to a region they’d long since abandoned.
On an industry-wide level, that’s not yet enough to reverse the exodus seen at the start of the quarter – meaning the average allocation to Europe has largely remained static. The more notable quarterly changes are found in the chart above. Cash piles have started to be reduced – and this is one trend that has continued fairly consistently over the quarter, as wealth firms start to drip money back into existing positions.
The greater interest in credit, meanwhile, is pretty much old news for allocators at this point. Of more significance is the shift in UK and US equity positions. We’ve discussed both these trends over the past few months, but domestic weightings have now fallen to record lows, raising the possibility that the average portfolio will soon have more in the US than UK equities. That would represent a big shift from the state of play as recently as 12 months ago. If wealth firms continue to stick to their guns, regime change will arrive sooner rather than later.
Averages like those mentioned above have never told the whole story. One consequence of recent market moves is that wealth portfolios are, in fact, showing levels of dispersion not seen for some time. Fund selectors may be clustering around familiar strategies in many sectors, but when it comes to asset allocation breakdowns they now look rather different from one another.
To take the above UK vs US equity example: a crossover point may be nearing, but this is being driven by a handful of firms rather than wholesale shifts. The main difference between now and a year ago is that several DFMs are now happy to combine a big US overweight with a very small UK position. That’s started to even out the playing field against those who’ve historically done the opposite.
Overall equity allocations, too, are starting to look very different from one another. That’s despite the vast majority of model portfolios fitting into the same risk-rating categories. Balanced portfolios are usually accorded a 5, or occasionally a 6, on the Dynamic Planner scale. In the past, that’s tended to mean DFMs’ overall equity weightings are fairly similar to one another: it’s the diversifiers, like bonds and alternatives, where there’s more room for manoeuvre.
But that’s starting to change. For every wealth manager who’s positive on stocks, there’s another who is sticking to a more cautious approach. A third of balanced portfolios now have 60 per cent or more in equity funds – but more than a quarter have less than 50 per cent. As uncertainty grows, the old consensus of holding 55-60 per cent in shares is starting to fracture.
US tech bosses experienced some collective unease yesterday when they faced a grilling from US lawmakers. Their answers may end up informing eventual antitrust legislation – though the jury’s still out on whether new rules will have much of an impact on the sector, even if the Democrats win both the presidency and control of the Senate in November.
That isn’t the only time the four businesses – Apple, Amazon, Facebook and Alphabet – will come together this week. Tonight, for the first time, all four companies will report earnings on the same day. This event, too, while it might make for some notable headlines, will be hard pressed to challenge the dominant market narrative of the moment. The structural forces driving tech are such that even earnings season may pale in comparison.