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Asset Allocator

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Hardy band of wealth firms convert precious 2020 gains; Reading runes for the 100% club

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Preach to the converted

When it comes to wealth managers’ asset allocations, few funds suffer as many categorisation issues as convertible bond funds. A couple of years ago we detailed the differing ways in which DFMs opted to classify these holdings. As of 2021, there’s still no consensus on how to do so: depending on where you look, the funds continue to be labelled as either bond, defensive equity or alternative offerings.

That may be one reason for buyers’ relative reticence to get involved with such strategies. Just one in six model portfolio ranges includes a convertible bond offering among their holdings, and even this proportion is down on the levels seen 18 months ago.

That’s despite returns having been extremely impressive in 2020 in particular. Compared with high-yield bonds, the typical convertibles fund posted shallower losses during the Q1 crisis and then rebounded much more strongly. Lest we forget, this is a reversal of the trends seen a couple of years back.

By the end of 2020, most convertibles strategies were up 20 per cent - compared with returns in the mid-single digits for the average high yield, IG or strategic bond fund. What’s more, the Barclays US convertibles index returned 50 per cent last year, ahead of even the Nasdaq. As some managers note, some strategies were able to have their cake and eat it – benefitting from both tech shares and the rally in ‘reopening’ names seen at the end of last year.

Inevitably, this kind of outperformance has led to concerns that things can’t last. Our asset allocation database shows that some DFM holders have now begun to trim exposures. But this relatively rare band of advocates will probably rest content in the knowledge that their faith has already been repaid.

Double down?

Returning more than 20 per cent in 2020, as described above, was not to be sniffed at. But there were a couple of strategies that did something not seen in the UK funds universe since 2016: posted returns in excess of 100 per cent.

That pair was Baillie Gifford American and Morgan Stanley US Growth. In the US, several more funds broke the three-figure threshold – and that has prompted Morningstar to take a look at the future prospects of such leading lights.

Unsurprisingly, its research found that, of the 123 portfolios to have doubled their money in a calendar year between 1990 and 2016, the vast majority struggled in the years to come. Only a fifth were in the black over the next three years, with the average strategy losing 17 per cent over that period.

To take an even smaller sample size, in 2016 (the last time such gains were made) there were three UK-based funds that made more than 100 per cent. Of these, MFM Junior Gold lost a quarter of its value in the next three years, while Charteris Gold & Precious Metals was more or less flat. Pictet Russian Equities, however, made a further 35 per cent gain.

That highlights the limits of this analysis: there’s no reason why strategies can’t continue to prosper after a runaway year. Particularly, some might think, when they focus on mainstream US equities rather than something more idiosyncratic.  

All the same, few would tip similar returns to be made over the next 12 months. It might then be worth pondering the next best performer of last year. Baillie Gifford Positive Change made a mere 80 per cent plus, so it doesn’t quite meet the double-your-money concerns outline above. But there will be many more DFMs who are backing this type of strategy to continue to outperform for many years ahead. 

Buy back

Martin Gilbert’s emergence at a new acquisition vehicle, as reported last month, would have come as little shock to most in the retail investment industry. What’s more surprising are the noises being made by his old company Standard Life Aberdeen.

Its new chief executive, Stephen Bird, has described himself to FTfm as “the reset guy”. That in itself makes sense, given the company’s struggling share price. The solution, however, looks like it’s in part to continue the strategy most associated with Mr Gilbert: acquisitions.

The new boss acknowledges that deals can “get done quickly and then regretted for a long time afterwards”, but has expressed an interest in private market, D2C investment and wealth acquisitions. Those are more obvious growth areas than mainstream fund management – but making deals pay off might ultimately prove just as difficult.

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