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Asset Allocator

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How selectors reassessed during a dramatic 12 months; A timely reminder of fund volatility

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Before and after

Much has happened in the world of wealth portfolios since the first UK lockdown arrived just under a year ago. Rapid market moves and sector rotations, coupled with structural shifts like the furthering of ESG concerns, have kept all allocators busy.

Has that produced a rethink of how portfolios are constructed? It can be easy to assume so, but there are structural barriers to change in some cases. Model portfolios, for instance, tend to be risk rated, which means the capacity for radical shifts can be limited.

All the same, as correlations change and risk/reward equations do likewise, the relative merits of equities, bonds and alternatives can start to look rather different. Or so the theory goes.

On the surface, model portfolios look remarkably similar to this point 12 months ago. We analysed a sample of 25 balanced portfolios, and in two of the most contested areas – fixed income and alternatives – allocations now are exactly the same as they were a year ago, at 25.4 and 14.4 per cent of portfolios, respectively.

Look more closely, as per the chart above, and there’s a little more activity. In alts, real asset positions have moved higher at the expense of absolute return or hedge fund holdings.

In fixed income, it may come as a surprise to see that one of the most talked about areas of recent weeks – government bonds – has seen allocations remain static over the past year. So too have high-yield holdings. The rush to investment grade credit seen last Spring has been funded, broadly speaking, by a reduction in short duration and EMD positions.

In the other main asset classes, things have changed a little more. The average equity weighting has crept higher, from 55.5 per cent to 57.1 per cent, while cash levels have been drawn down from 4.9 to 3.3 per cent.

Within equities, we’ve documented the biggest shifts on more than one occasion in recent times: three percentage points have been knocked off UK allocations, and that money (along with the extra cash mentioned above) has been parcelled out to US, Asian, and global or specialist offerings.

Highs and lows

One fund popping up on more and more selectors’ radars in recent months is Ninety One Global Environment. The strategy is still relatively new, having launched in Europe two years ago and in the UK in December 2019. But its approach and early returns captured attention.

The fund made 54 per cent last year, and its process stands out even among ESG peers: it only invests in companies that are helping decarbonise the world economy, and publishes carbon data alongside regular metrics such as holding and sector breakdowns.

Those two strengths have combined to bring in a lot of money, this year and last. According to FE estimates, the UK-based version of the fund has doubled in size since the start of 2021 alone, and now holds £800m in assets.

Those inflows are easy to spot at the moment, because they’ve coincided with a drop in returns: the fund has grown despite shedding 7 per cent in performance terms year to date. Renewable energy has been among the biggest fall guys of the current sector rotation, and that’s pushed the strategy to the bottom of the IA Global sector.

These risks are arguably magnified by a policy that doubtless also found favour with fund selectors: the strategy’s concentrated portfolio. With just 26 positions, the managers have the courage of their convictions.

In this context, the recent rollercoaster shouldn’t come as much surprise to buyers: they would have backed themselves to ride out such performance. That philosophy is being tested a little earlier than they’d perhaps hoped. But it’s a useful reminder that sustainable strategies can be as volatile as any others.

Matching up

In the US, the fall in Treasury prices is such that the 10-year yield is now broadly equivalent with the dividend yield on the S&P 500. You only have to go back 12 months to find the last time this happened - and, as commentators point out, the prospects for dividend growth are arguably a little better now than they were then. 

That's from a very low base, of course. And this is one case, needless to say, where the US stands apart from other developed market peers. The FTSE All-Share, helped in this regard by its recent struggles, still yields 3.1 per cent. It will be a long time before benchmark gilt yields can match that. 

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