Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.
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Are wealth portfolios cashing in or cashing out in Q4? For all that 2020 has thrown at them, most DFMs have had a respectable year as far as returns are concerned.
That’s reflected in the structure of their portfolios. Take cash levels, for instance: in many cases, weightings don’t look that unusual compared with historic norms. What’s more striking is that many discretionaries have now pushed those weightings below where they were a year ago.
Our asset allocation database shows almost four in ten DFMs’ moderate portfolios are now holding less cash than they were at this point last year. A further 22 per cent have come full circle – or else not touched their cash positions at all over the past year – with the other 39 per cent having upped weightings.
Of course, while it’s hard to forget the threats facing risk assets this year – from the pandemic, to political risk, to elevated valuations – it’d be wrong to assume all was rosy in 2019. Portfolios faced Q4 threats of their own back then, chief among them the political uncertainty on these shores. So there was reason for elevated cash levels then, too.
In total, DFMs’ average cash holdings at the end of September 2020 – just under 5 per cent – are little changed from the position seen last year. That’s in keeping with fund managers’ own views: the monthly BofA survey shows their average cash positions are also in line with this time last year.
But the composition of the groups who are overweight, and those who are underweight, has altered. Faced with a new cocktail of risks in 2020, it’s a slightly different cluster of DFMs who are maintaining above-average cash positions as Q4 begins this time. This is hard market in which to maintain a perennially bullish, or perennially bearish, stance.
This year’s labours have meant the asset manager M&A train has slowed down considerably in recent months. Admittedly, Jupiter’s deal for Merian and Franklin Templeton’s acquisition of Legg Mason - both agreed in February – were more than enough for the industry to be getting on with. But there's been little activity since then.
Now there’s a sign that one of the architects of the latter deal is pushing for an even more significant combination. US activist Trian – which helped spur on the Legg Mason acquisition – has taken 10 per cent stakes in both Invesco and Janus Henderson. The WSJ says its ambition is to merge the two companies.
At this point, fund selectors recognise that M&A is a fact of life. And there’s little sign that deals, however unusual, have much immediate impact on which funds make which buy-lists. Teams failing to bed in isn’t usually a huge cause for concern nowadays.
That said, as the pool of go-to providers narrows, selectors do occasionally find themselves with too much exposure to a newly-enlarged firm in a given asset class. And while an Invesco deal for Janus Henderson is unlikely to be right around the corner, it’s notable that their areas of strength are starting to overlap.
After a series of shake-ups in recent years, DFMs are now predominantly interested in the two companies' ranges – if it all – for their fixed income, absolute return, or perhaps European equity offerings. These funds are often complementary rather than conflicting: eg the long/short absolute return fund run by Janus Henderson, versus a multi-asset option at Invesco. But that might only serve to make the concentration issue more relevant, were a deal to eventually occur.
Amid the ups and downs seen in risk assets this summer, there’s one part of the market that still looks pretty broken. Dividend cuts may be priced in for most equity income stocks, but that hasn’t prevented funds fishing in this pool from continuing to struggle.
The UK Equity Income sector was the worst-performing of all in September, the average fund losing 2.3 per cent. In July, it was third worst, racking up a loss of 2.9 per cent. In August – a month in which many equity markets raced higher – the sector lagged again with a 2 per cent rise. The All Companies cohort didn’t fare much better in any of these periods, but income stocks’ continued underperformance on both the upside and the downside won’t inspire confidence.