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Wealth managers hold back from embracing 'regime change'; Alt credit flies under the radar

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Beyond the hype

Strategists given to grand pronouncements about the year ahead have luck on their side this year. With 2021 around the corner, vaccines, votes and more Brexit vacillation has made bold calls for the the next 12 months look more plausible.

Wealth managers, however, might be inclined to take a more cautious route. Some shifts are taking place, but at a portfolio level the evidence is a little thinner.

Parmenion, for instance, says it’s making “the most significant change…in over a decade” to its own strategic asset allocation this month. But it suggests these shifts are more about long-term structural changes to the investment universe – some of which may admittedly have been accelerated by the events of 2020 – rather than a response to recent episodes themselves.

And in practice, the changes don’t represent a complete overhaul. The shift involves separating out bond holdings into constituent parts, and a couple of tweaks on the equity side. Those include increasing exposure to EM and Asia ex-Japan equities in higher risk mandates and lowering UK equity positions across the board.

Most notable is the company’s stance on commercial property: the asset class retains its position as a “core element” of portfolios.

Not all DFMs agree will agree with that. Rathbones’ David Coombs says his team continue to avoid property and don’t expect that to change absent a “more specialist, tactical activity” presenting itself. He’s also yet to be convinced by the value rally, particularly in “murkier” corners of the market like hotels and airlines.

So while the Rathbones team has been buying companies with more sensitivity to economic recovery, they suspect value investors will continue to find things challenging for many years to come

All of which is pretty instructive for the wealth management sector. Investment bank analysts may tip an array of riskier asset classes for the years ahead, but wealth managers are minded to think more carefully. Individual DFMs may not agree on every asset class, but the need for prudent adjustments remains uppermost in most minds.

Assets backed

One asset class that hasn’t been touched at all by discretionaries this year is mortgage and asset-backed securities. Funds investing in this area remain relatively popular among DFMs searching for alternative credit plays, but there’s been no big buying or selling taking place.

Our asset allocation database shows that not a single one of these funds was added to, or removed from, model portfolio ranges during 2020. That doesn’t mean existing positions haven’t been pared or upped over the past 12 months. But in the main, opinions haven’t changed.

All the same, there have been performance challenges, for MBS in particular. Popular US funds like Semper Total Return and Angel Oak Multi-Strategy Income saw steep drawdowns at the height of the crisis, and have yet to fully recover those losses despite Fed support for the wider market. That’s partly because ultra-low interest rates have fuelled a wave of refinancing.

For now, DFMs have retained their exposures. The same inertia can be seen among those holding European ABS funds, the most popular of which is TwentyFour Monument Bond. Cautious strategies of this kind made it through the spring relatively unharmed, and have resumed a slow progression since.

This resilience hasn’t been enough to attract more buyers. But as alternative credit continues to rise up the agenda, such funds are likely to be scrutinised a little more closely by selectors – for better or for worse.

Time to decide

After another year of uncertainty, the UK has once again pencilled in December 13 as the date on which a big decision about the future of the nation is revealed. The latest set of Brexit talks, to the surprise of virtually no one, have gone to the wire once again.

The EU has already raised the possibility of kicking the can further down the road, and that outcome can never be fully dismissed when discussions of this nature are concerned.

Regardless, allocators will still be looking to this weekend as their latest political risk D-day. It’s not easy to say whether the latest cliff-edge outcome will have a long-term impact on allocators. But in the short-term, they should get ready for more volatility.

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