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Near the crossroads
As allocators try to make sense of September’s nervy markets, the events of August will already feel like a distant memory to some. But a month which saw US equity outperformance reach new heights has already had an impact on DFM portfolios.
Historically, the summer months aren’t the time to chop and change positions. Then again, 2020 isn’t like other years, and data shows more than one wealth manager used the period to reassess their allocations.
The upshot of those decisions, when coupled with the market moves seen over the summer, is that the potential tipping point we spoke about in July has drawn closer still. US equities’ August rally may have been cause for concern for some, but at a portfolio level it’s meant allocations have moved another leg higher.
Some of this is because DFMs simply allowed positions to drift higher. Yet our asset allocation database also shows that August was the month in which one or two bears finally capitulated and closed their US underweights.
UK equity weightings, however, continued to drop back. Europe, by contrast, saw allocations tick higher for the first time in several months.
As the cash and government bond weightings indicate, the summer did see risk appetites increase slightly. But it’s perhaps notable that high yield debt, not shown on the chart, saw a slight dip in interest over the period.
Instead, money taken from cash piles money largely went in one of two places: either to US stocks, or to investment grade corporate bonds. But with tech shares showing signs of volatility, and the election nearing, it’s very possible that US positions have now peaked.
That said, there’s still widespread acknowledgement that equities are more or less the only game in town. Bernstein strategy head Inigo Fraser-Jenkins – now forever associated with the ‘passive investing is worse than Marxism’ argument made a few years back – noted in the FT yesterday that pension funds, for one, can’t afford not to buy more shares.
Others have more options, but they too are constrained. The FT’s Long View column makes the case for alternatives…but concludes by recognising that such assets inevitably form a relatively small part of portfolios.
DFMs will recognise that argument. Alternative assets – be they absolute return/hedge funds, commodities or real estate plays – account for around 15 per cent of the typical Balanced model. But the very nature of these portfolios, structured as they are around third party risk-ratings, does limit room for experimentation. Other assets may be able to replicate the equity risk profile, but for most wealth managers there’s still no substitute for the real thing.
To again take Balanced model portfolios as an example: the average equity allocation was 53 per cent as of the start of September. The median allocation was also 53 per cent. And there are few major outliers – of all the firms in our database, only one has an equity weighting of less than 40 per cent, and only one has more than 65 per cent. There may be plenty of room for manoeuvre under the surface, but even lofty valuations can’t detract from the fact that equities are still the main driver of returns for clients.
Some DFM clients will have very different risk appetite to others, of course. And in recent years, many more clients have been at or near retirement. That’s partly because of the amount of money that’s flowed into discretionary coffers via the DB transfer rush.
A stricter regulatory approach to advisers’ transfer policies means this source has started to ebb lately – and figures released today show the extent of that decline. The total number of DB transfers dropped some 28 per cent in 2019/20, according to FCA figures. The question for this year, and beyond, is whether the crackdown on advisers will stop that flow entirely – or whether those clients for whom this is a sensible option will still be able to take that opportunity in future.