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

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A familiar alternative

Wealth managers’ search for diversifiers has seen them look far and wide for alternative assets this year, with latest arrivals including event-driven strategies and alternative ESG. But many DFMs have found their quest arriving at familiar destinations.

The chart below, detailing discretionaries’ top alternative fund selections as of this summer, contains several names that would have featured on the list five or even ten years ago. And these funds are of a kind largely deemed to be out of favour with fund buyers nowadays: multi-asset absolute return, or even plain old multi-asset, offerings.

The reasons for this presence are varied. Janus Henderson UK Absolute Return is a perennial favourite, but strategies like Troy Trojan have returned to prominence this year as markets turned.

JPM Global Macro Opps, meanwhile, managed to weather the departure of key personnel in recent years and topped that off with impressive performance in 2020. BNY Mellon Real Return manager Iain Stewart retired at the end of last year, but his old fund didn’t do nearly as well at protecting investors in Q1. Its enduring popularity is likely more as a result of its healthy yield: it's seen an increase in DFM holders so far this year. And even Invesco Global Targeted Returns, which has long since passed peak popularity with the wider retail market, remains pretty popular with discretionaries.

All told, that leaves limited room for many of the newer offerings. As previously discussed, NB Uncorrelated Strategies is one that’s managed to break into the upper echelons. Fortem Capital is another, though that fund’s steep drawdown in March may mean it’s on borrowed time with many. The vast majority of the more esoteric or sophisticated strategies charted by our database, however, remain outside the top ten. There are many intriguing alternative fund choices being made by DFMs, but in aggregate their most popular picks look rather conventional.

Backstop

One diversifier that’s worked really well for wealth portfolios once again this month is the pound. The latest tech wobble helped push global equities into the red last week, but sterling weakness meant those returns stayed positive for UK investors.

The renewed strength of the US dollar, coupled with renewed uncertainty over Brexit and other domestic political issues, have seen the pound fall 5 per cent against the greenback this month. The will-they won’t-they over negative interest rates has also weighed on sterling: last week’s clarification coming after the damage had already been done. So the blow to overseas holdings has once again been softened somewhat.

This has also meant a further discrepancy emerging in some index returns: Pimfa’s Global Growth benchmark is again trumping even its Conservative equivalent this month, and has extended its year-to-date lead over all other private investor indices.

Tech strength and currency effects have dovetailed rather well for UK fund holders thus far this year – and that’s very much in keeping with the pattern seen since 2016. Sterling weakness has tended to coincide with risk-off moments for markets – many would say the former stems from the latter nowadays. Be that as it may, it’s continued to give domestic investors a useful buffer when they’ve needed it most.

One door opens...

A tale of two trusts at Jupiter today, both involving former Merian managers. The unlisted asset vehicle Chrysalis is taking advantage of its recent popularity by seeking to raise another £50m. But the board of the UK Growth trust, recently taken over by Richard Buxton, has proposed liquidating the company in view of its increasingly small asset base.

Both are a sign of the times, not least in terms of big fund buyers’ current preferences. The ability to tap into unquoted assets remains a particular interest, given the potential for excess (if not necessarily uncorrelated) returns. Many listed equity investment trusts, by contrast, are still viewed as the poorer siblings of their open-ended equivalents. And DFMs' opinions on this front are unlikely to change any time soon.