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Asset Allocator

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Bond quirks leave managers puzzling over next moves; Boom time emerges for wealth firms

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Hitting the buffers

Things have calmed down a little in government bond markets this month, but the stakes are still high enough to get fund managers worrying. Some are puzzling over latest moves, others are buying back in, and many more are still worried about overall valuations and the implications for portfolios.

The sight of bond yields climbing in response to hopes of economic recovery last month was at least understandable, however rapid that rise proved in practice. Last week, however, better economic data in the US prompted a small but notable rally in Treasuries.

Allianz’s Mike Riddell told the FT the move was “bonkers”, and suggested different buyers were testing the bull case and the bear case for government debt. Certain managers still have faith in the former – Eric Lonergan of M&G has been buying 30-year Treasuries, content that their inverse correlation to risk assets remains a valuable diversification tool.

Some analysts, meanwhile, suspect the yield pick-up that Treasuries offer to international investors has helped stabilise prices for the moment.

There’s little sign, however, of regular UK wealth portfolios seeing recent weakness as a buying opportunity. Our asset allocation database shows the odd DFM did see the virtues in adding to credit last month, but not much in the way of renewed appetite for government bonds.

The price action described above makes such reticence understandable.  For wealth firms, the risks flagged by Orbis earlier this week remain paramount. Orbis' calculations show the valuation of a traditional 60/40 portfolio remains close to the record highs reached last year. That suggests unusual price moves are here to stay – as is the need for more diversification.

Sitting pretty

For those seeking signs that the wealth industry is still flourishing despite it all, look no further than Tatton IM’s trading update this morning. The company expects full year results to be “ahead of all analysts’ forecasts”, having taken in £755m in net flows over the year to March 31.

Tatton’s low-cost offering has helped it establish a lead in the on-platform MPS space, but this isn’t just a story of a single company. In recent months much of the attention has been on the boom in retail investors – but it’s not just the unadvised who've been keen to put more money into their investments.

Transact parent company Integrafin also reported numbers this morning, recording its highest-ever quarterly inflows for the first three months of 2021. Broker Numis believes advisers were able to secure “additional investment” courtesy of clients' “Covid-forced savings”, and anticipates similar outcomes across the industry. A boom in advised asset growth might be emerging just as the retail surge starts to fade.

Of course, even advised clients don’t have an inexhaustible pile of cash, particularly if economic reopening provides more chances to spend in the months ahead. And there’s no doubt that the competitive threats to DFMs’ offerings are stronger than ever – both within and outside the traditional wealth management industry.

All the same, for those whose business models are well attuned to investors’ preferences, the opportunity has rarely been greater. The problem for allocators is how to invest new money at a time of great uncertainty. All things considered, it’s a good problem to have.

Back in play

As style preferences changes, some unheralded funds are returning to selectors’ radars. Witness the announcement from Alliance Trust last Friday that it's to introduce two new managers to its multi-manager portfolio.

The first pick by the trust’s investment manager, Willis Towers Watson, is firmly in the growth camp. Sands Capital’s equity strategies have flourished in recent years on the back of this approach.

The second, from UK boutique Metropolis, goes in the other direction. Its value offering last featured in our DFM fund selection database in mid-2019, when a sole remaining holder exited their position. The firm has never been the most prominent name when it comes to discretionary fund selections, but changing times are providing more opportunities for those who have skirted the fringes of fund buy-lists for some time now.

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