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Diversification 101 still winning favour with DFMs; Allocators stuck in gear as cycle shifts

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Bond benefits

Across the Atlantic, Treasury yields are starting to tick higher as investors factor in the prospect of a major stimulus plan. But allocators have yet to see signs that something similar is likely on these shores. The chancellor may be starting to worry about spending levels, but there’s plenty of evidence the bond market isn’t too fussed at all.

A blend of central bank support, institutional appetite for safe haven investments, and the lengthy average maturity of the UK’s outstanding debt make for powerful countervailing forces. Not all of these are unique to the UK, but then there's little sign of fiscal firepower or inflationary pressures to offset them, either.

From wealth portfolios’ perspective, UK government bonds’ most important attribute this year has been their ability to act as a diversification tool. With yields on developed market sovereign debt now at record lows, those questioning 60/40 portfolios are making their voices heard once again. But there’s no indication DFMs’ own worries on this front have materially changed in 2020.

As you’d expect, several wealth managers added to their UK government bond positions at the start of this year. Inevitably, not all will’ve got the timing right. And gilt exposures have started to dip again as risk assets resume their upwards paths. But of those discretionaries who do hold gilt funds, our fund selection database shows not one has felt confident enough to sell out entirely in the aftermath of those market ruptures.

UK retail fund sales similarly show that gilt strategies have just enjoyed their first three months of consecutive inflows in more than a year. Judging by the actions of wealth firms, as well as their retail and institutional counterparts, there’s no sign that investors fear a rate spike is around the corner.

A big if

A degree of caution can also be found in the latest Bank of America fund manager survey, though it’s becoming increasingly difficult to pick out.

Some 60 per cent of investors now say we are in the “early” portion of the economic cycle, rather than heading into recession. Similarly, a net 27 per cent of investors are now overweight shares.

Cash levels, too, have fallen at their fastest rate since 2003 – but when you consider that’s a drop from 5.9 per cent to 4.4 per cent over a six-month period, and factor in the speed of the market recovery, this particular shift looks thoroughly reasonable.

And there are a few other signs that a full conversion to bullishness has yet to emerge. Concerns over a contested election result are on the rise, there’s the small matter of the ongoing pandemic, and a net 12 per cent of investors say they aren’t taking any more risk than usual. On top of that, wealth firms won’t need reminding that current risk appetites remain distinctly hungry for growth stocks rather than unloved sectors.

BofA suggests the key moments are still to come this year: it expects a “final capitulation into risk” in the fourth quarter. Of course, if the global economy truly is in an early cycle phase, that would prove to be the correct move to make. Irrespective of the factors behind it, that ‘if’ remains the biggest call of all at the moment.

Siren song

Hipgnosis Songs has been one of the success stories of the year in the investment trust space, raising more than £400m from two issues and attracting a wide array of investors. The trust’s healthy dividend yield is part of the attraction, though it is currently sitting on a small discount to NAV.

Nonetheless, others are looking to get in on the action, even in this most niche of asset classes. The Round Hill Music Royalty fund said this week it was looking to raise $375m as part of a UK listing.

Wealth managers are always on the look out for vehicles that offer uncorrelated income streams, or even uncorrelated returns of any kind. And music royalties certainly appear to fit that bill for some bespoke portfolios at the moment. But there’s more than one sceptic out there: yesterday’s Lex column, which described Hipgnosis as Livin on a Prayer, isn’t the first critique of its offering, and nor will it be the last. Holders will hope the music can keep playing and they can keep dancing.

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