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Alterations

Wealth managers have had their hands full dealing with the shifting fortunes of equities and bonds this year. And rather than acting as dependable replacements, alternative asset classes have only added to the juggling act.

Yesterday we looked at turnover levels across the industry so far in 2020, highlighting that areas like credit and global or thematic equities have seen particularly notable levels of change. The chart below indicates that alternative positions have very much been up for debate, too. While turnover rates can’t match the very highest on display yesterday, they do comfortably exceed that seen for the typical equity sector:

The elevated rate of property switches makes perfect sense. Most discretionaries had already sold out of open-ended funds prior to the string of suspensions seen earlier this year. But they have had to contend with a sudden revision to the outlook for commercial property as a whole. That’s affected all holders, whether they prefer investment trusts, property securities or something else entirely.

In contrast, while gold exposures have received their fair share of attention this year, the volume of buys and sells is more or less in line with the average level across all asset classes. That’s partly a factor of the relatively small pool of options available to wealth portfolios: most have been content to adjust existing exposures rather than buy a new fund or dispose of positions entirely.

But it’s arguably the rate of change among absolute return and hedge fund positions that’s most notable. More than a quarter of all positions were turned over in the first nine months of the year. With more than 150 different funds of this ilk now held by DFMs in their model portfolios, this is more evidence that fund buyer consensus – and, perhaps, confidence – is in short supply when it comes to such holdings.

Keep it simple?

There’s still a select band of allocators who never ventured into the alternative asset arena at all. Chief among them is Vanguard, which has continued to advocate for 60/40 portfolios while most around them decry the strategy.

Its stance is still serving it well this year: the firm’s LifeStrategy funds, still viewed by many advisers as a simpler, cheaper alternative to model portfolios, are mostly back in the black for 2020.

Not for the first time, the 60% Equity variant is a couple of percentage points ahead of both the Arc and the Pimfa Balanced indices year to date – though it did suffer a slightly bigger drawdown than those benchmarks during the market nadir in March.

Vanguard believes its diversification strategy remains intact, even at a time when yields remain either negative or close to zero. Its portfolios reflect that contrarian call: the 60% Equity fund’s bond component still has an effective duration of almost 10 years, according to Morningstar.

This theory will be tested again as and when equities come under pressure. But for now, it’s worth noting that the opposite trend isn’t having too much impact on government bonds. After all, the equity market rally prompted by the vaccine news this week and last wasn’t accompanied by a material spike in Treasury yields.

This could mean investors are waiting for a more prolonged equity – and economic – bounce before making such calls on sovereign debt. Alternatively, as Bloomberg notes, this subdued reaction reflects the fact that the Fed is in no hurry to do anything. That increases the odds of Vanguard's portfolios continuing to look hardy, rather than foolhardy, in the months ahead.

Crossing the streams

Illiquid assets are back in the headlines again: Bank of England governor Andrew Bailey has hinted that the economic recovery could be helped by a loosening of investment regulations. His focus is pension schemes, and their current relatively limited interest in illiquid asset investment.

Mr Bailey was, of course, until recently the head of the FCA, which is still dealing with the fallout from both the latest open-ended property fund suspensions and the fate of Woodford Investment Management.

These twin focuses aren’t necessarily contradictory: the key differentiator is that pension schemes’ time horizons are much longer than those adopted by retail or intermediary investors. All the same, the two groups can’t be neatly split in two: rules changes for property funds would probably affect schemes’ willingness to invest, and pension savers have an ultimate right to immediate access to their funds, too. It will prove difficult to alter behaviours in one group without affecting the other.