Private client portfolios confront the real-return menace; Consensus calls start to drift apart
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Diminishing returns
For all the rapid asset price moves seen this year, it's long-term portfolio construction that's uppermost in allocators’ minds. Many current debates, per our discussion yesterday, still focuses on 60/40 models. For wealth managers, it’s a little more complicated than that.
The question for DFMs and their clients is exactly how much risk to take in a world where returns are much harder to come by.
This is another issue that’s been raised more than once in recent years, only for healthy equity and bond returns to kick the can down the road. But the crux of the matter - that allocators will now have to take more risk to achieve the same level of return – is hard to counter.
Graham Harrison, group MD at Asset Risk Consultants, has taken a closer look at how wealth managers have responded to this challenge up til now. The somewhat surprising results indicate “there is no evidence that the relative risk of private client discretionary portfolios has increased” since the financial crisis. Our own asset allocation database suggests much the same in recent years: equity positions reached a near-term peak this summer, but not to the extent that they're moving the long-term dial.
Two theories are ventured by Arc: either private clients have reduced their real return expectations instead of accepting more risk, or they don’t realise that their portfolios are unlikely to meet expectations in future.
Given how well those portfolios have performed in recent years, the latter must be a real risk. Any DFM worth their salt will have been trying to manage expectations for some time now, but the reality may prove hard to countenance. After all, the Arc paper suggests a minimum equity exposure of 75 per cent is now required to achieve a real return of 3 per cent per annum. That suggests that defensive and even balanced portfolios, in their current forms, will have their work cut out to deliver any kind of real return.
Lucky dip
In the short-term, retail buyers continue to cherry pick additions to their portfolios – with little agreement on what might work. October fund flows are a case in point. This was a month, after all, that followed on from a bit of a blip for tech in September. The Covid-19 resurgence in Europe may have convinced some allocators to double down on the new normal, but others were looking at the possibility of a reflation trade sparked by a blue wave in Washington DC.
All of which means that there was a variety of different strategies occupying the top slots in the fund flows chart last month. Regular presences like Fundsmith Equity and Allianz Strategic Bond competed with those that bucked the trend, like L&G’s European equity tracker – which saw its highest net inflows for more than a decade – and the more cautious approach of Ruffer Absolute Return.
The only two constants, as ever nowadays, were the structural support for both trackers and ESG funds. But it’s still relatively rare for those two trends to combine: appetite for sustainable passive options is still surprisingly muted, though RLAM’s EM ESG Leaders tracker fund was a rare exception .
It was a similarly mixed bag at the bottom end of the scale. That said, a number of UK and global income funds continued to struggle with outflows: not many buyers think now's the time to dip their toes back into the world of dividend payers. Next week we’ll take a closer look at discretionaries’ own recent allocation changes, as well as their biggest buys and sells of the year so far.
A lack of reserve
One of the most outlandish predictions for 2021 has already arrived: Citi thinks the dollar could fall 20 per cent next year, driven by coronavirus vaccines that help kickstart the global economy.
Forecasts of dollar weakness in the new year are a familiar sight, though clearly it’s the scale of this particular call that stands out. Consensus expectations are for a 3 per cent fall in 2021.
To be fair to those who predicted likewise at the end of 2019, the greenback is down 4 per cent year to date. But while the animal spirits that accompany a return to ‘normal’ could be fierce, it would take a brave currency trader – let alone a long-term portfolio manager – who banks on double digit falls for the world’s reserve currency in 2021.
