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Asset Allocator

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60/40 portfolios versus democracy; Buy-list specialisation puts high-risk options on the table

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

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Times of great uncertainty, and the extraordinary policy responses that accompany them, mean investors increasingly find themselves questioning received wisdom.

For many allocators, this process started in earnest at the time of the financial crisis. More often than not, it's been central banks that have received the majority of the credit – or blame – for shifts in market dynamics.

Of course, monetary policy interventions have reached new heights this year. So much so that Morgan Stanley analysts, in a recent note, say that corporate bond buying programmes are helping transform financial markets from a competitive market to a monopsony – in which a single buyer effectively controls proceedings.

This isn’t necessarily new thinking: after all, the ‘don’t fight the Fed’ warning has been around for half a century. But other strategists are now broadening their horizons further still: from perceived market failures to social ones.

Former Pimco economist Paul McCulley told Bloomberg earlier this month that the continued success of the 60/40 portfolio would be a sign that “democracy has failed”. His point is that the traditional balanced portfolio was borne out of a world where controlling inflation, not employment, was the driver of monetary policy. And Mr McCulley isn’t alone in thinking that the pendulum needs to shift away from capital and back to labour.

But it's the debate over 60/40 – if not its mooted social consequences – remains of particular interest to wealth managers. We noted yesterday that Treasuries moved higher amid tech stocks’ stumble. Some commentators say that rise was too meagre to matter – and therefore an indication that sovereign debt’s diversifying qualities really have started to erode.

Allocators still holding government bonds would say a week’s worth of activity is scant evidence. They’d likely wager that a full-blown risk-off event would prompt a concerted flight to Treasuries as per usual. That may not be useful from a societal point of view, but it would fit the bill nicely for wealth managers and their ilk.

Further afield

To add some context to those emerging market woes touched on yesterday: it’s worth noting that, in local currency terms, the MSCI Emerging Markets is still ahead of all major developed indices over the past 12 months – S&P 500 included. On a sterling basis, it’s behind only the S&P and the MSCI World.  

A severe lack of confidence in the outlook is the main reason why DFMs aren’t embracing the asset class. A focus on privately-owned companies might be a smart way to take exposure. As we’ve noted in the past, discretionaries’ preferred solution is often to focus on Asia ex-Japan funds instead of broader offerings.

More recently, Chinese equities’ outperformance has started to attract greater interest from those same fund selectors. It’s not often that the reward from such shares is deemed to outweigh the risks. But China A-Shares funds have started to pop up on a few buy-lists in recent months.

This isn’t a widespread phenomenon just yet – it equates to just one in five wealth managers in our fund selection database. All the same, it’s clear that wealth managers are starting to look more closely at specific themes to add to their higher risk equity portfolios. As investors continue to crowd around a small group of developed market equities, it may be that this appetite for specialisation encourages more buyers to pinpoint geographic areas of interest, too.

Fair exchange

Traders’ attention turns to the ECB this afternoon, when Christine Lagarde will give her usual press conference in the aftermath of the central bank’s uneventful policy statement. Interest lies in whether the president will attempt to talk down the euro in light of its recent strength.

The euro’s rise hasn’t left it looking overvalued by historic standards, but a 10 per cent rise against the dollar over the past six months has got some worrying about the impact on the continent’s recovery.

There are doubts over whether the ECB could shift the currency lower, even if it wanted to. If it tries, the central bank’s words may help prevent further appreciation, but not do much else. That would represent something like an ideal scenario for sterling fund selectors: the currency’s summer jump has been the cherry on top of the increasingly attractive returns posted by the continent’s equity market. A holding pattern from this point onwards would jeopardise neither the economic recovery nor those FX gains.

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