Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.

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On the fence

The month that got many investors thinking again has done little to alter asset managers’ own view of the world. When we last checked in on fund firms’ asset allocation preferences, at the start of the fourth quarter, we noted a series of significant shifts had taken place. That’s not the case this time around.

Despite the vaccine news that prompted all manner of rotation talk last year, most fund firms have barely shifted their positions since then. Our regular compilation of a series of UK firms’ outlooks illustrates the point: compare the chart below with its Q4 equivalent, and it’s hard to spot the difference:

There are a few tweaks: the retreat from Japan has quickly been reversed, allocators perhaps realising they’d got that one wrong in the short-term. By contrast, Asia ex-Japan equities have fallen from favour a little, despite – or perhaps because of – the region’s relative resilience in 2020.

But a steady hand seems to be the order of the moment: bond preferences, for instance, have barely shifted. Even government bonds retain the majority of their prior support, suggesting that inflation worries haven’t yet kicked into gear.

And there’s no sign that fund managers have turned more confident on unloved regions like the UK. For the second quarter in a row, not one could bring themselves to be outright positive on the domestic market.

The US, meanwhile, retains its status as the most favoured region – and even the sole negative view has now turned neutral. That’s the dominant word for many: more than one asset manager is now neutral on every single equity region. Even fund firms, it seems, are finding it increasingly difficult to make conviction calls.

Unbreakable bond?

As per the above, sentiment on investment grade debt remains pretty healthy: of all the asset classes outlined in the chart above, it;s second only to high yield in terms of positivity.

The continued presence of central bank support means few think IG credit as a whole will start to materially struggle in the coming months. But there is some nuance here.

While all the firms in our sample are happy to maintain their positions heading in to 2021, a number do sound a note of warning in their commentaries. That’s due to the considerable tightening of spreads that’s taken place since last March. And unlike high yield, many parts of the investment grade market now offer little in the way of coupon compensation.

As Goldman Sachs noted last month, US IG bonds have seen real yields fall into the red for the first time ever. Globally, a quarter of all investment grade debt was trading on negative yields as of the start of December.

All the same, fixed income buyers are increasingly finding themselves pushed even further along the risk scale. There may be good reasons for buying high yield and emerging market debt instead, but the remain riskier propositions nonetheless.

When it comes to the IG exposure that is being retained, it’s a familiar story for fund managers and fund selectors. Our regular looks at strategic bond funds show that the BBB-rated debt remains a sweet spot for fixed income allocators. Might that change in 2020? Globally, the share of high-yield indices taken up by ‘fallen angels’ – firms downgraded from investment grade to high yield – rose from 18 per cent to 30 per cent last year, according to JP Morgan. It too could yet prove a happy hunting ground for bond buyers.

Preferred options

Consolidation may be a feature of the retail investment industry, but there does seem to have been a slight shift in priorities for the big buyers in recent times.

A few years back, full-scale vertical integration was all the rage: think Old Mutual buying Quilter and so on. Owning discretionary businesses, as well as advice arms, was seen as the way forward.

Since then, those goals have been scaled back a little: Old Mutual (later Merian) separated from Quilter, and Investec’s asset management arm also left its wealth business behind when spinning out from the parent. There are plenty of fully integrated firms still out there, but equally there are now fewer big-name acquirers of DFMs.

And that’s despite businesses like Fidelity taking the plunge and moving into wealth management themselves. Whether these giants have the appetite for a bolt-on discretionary offering, in addition to their home-grown plans, is still an open question.