asset allocator header image

Asset Allocator

from Asset Allocator

Boring bond funds hint at racier times to come; Wealth portfolios dodge market volatility

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

Forwarded this email? Sign up here.

For our new fund selection podcast, tune in on Acast or Spotify, or find us on Apple Podcasts.

Not so dull

Bond – and bond fund – flaws are back in the spotlight, courtesy of a pair of articles that question whether securities and collectives alike are doing their jobs correctly.

The FT analyses an academic paper that suggests almost a third of US bond funds are misrepresenting the securities they hold in order to secure a better Morningstar rating.

The research firm, for its part, told the FT the paper itself is flawed; Morningstar’s attempt to replicate the results found no evidence of a relationship between ratings and the funds in question.

Separately, on Friday Bloomberg discussed analysis from JPMorgan Chase which finds that the correlation between investment grade bonds and US shares is at its highest level since 1997 on a one-year trailing basis, and the highest since 2008 on a three-year view. The newswire not unreasonably notes that this presents a diversification problem.

From wealth managers’ perspective, both issues are real issues for portfolios. Equally, they’re also risks with which they’re already familiar.

The subject of loading up on riskier and/or unrated debt is one we covered last month in relation to strat bond funds. For this cohort, fund disclosures are at least clear enough to indicate that managers have been moving along the risk spectrum.

Investment-grade funds may present a different issue. Kicking the tyres of these seemingly anodyne offerings remains important – particularly after a year in which wealth portfolios have been happy to bank the credit rally’s excess returns.

In this context, the slump in government bond prices seen this spring might be a simple test case: those IG strategies that struggled then might be best placed to rally should sovereign debt prove a counterweight to future equity falls.

Equally, those DFMs who distrust government debt’s ability to act as a diversifier may not mind if their investment-grade offerings are adopting riskier stances. Because in the event that equity and government bond prices do fall in tandem, all bets are off in any case.

Eerie calm

For a summer month, July’s market action had its fair share of drama. Benchmark US Treasuries posted their best month since the nadir of the coronavirus crisis in March 2020, and latterly the sight of a Chinese crackdown sent a number of EM stocks spiralling at the start of last week.

All of this, however, ultimately amounted to very little. Initial Arc estimates suggest that the average ‘Steady Growth’ wealth portfolio returned precisely 0.0 per cent in July, with riskier or more cautious mandates similarly muted.

This was the second month in the past three to have produced such an outcome, following on from a similarly becalmed May. In the latter month, Arc’s Cautious, Balanced, Steady Growth and Equity Risk indices posted estimated returns of between 0.1 per cent and minus 0.2 per cent.

Periods like these are becoming more common: last September also produced a similarly benign outcome, while this February wasn’t far off. These shifts aren’t in keeping with the narrative that suggests volatility will become more commonplace as the bull market continues to mature.

Central banks’ generous provision of liquidity may have something to do with that, of course. Which means the question of whether the Federal Reserve will turn its attention to tapering remains a, if not the, key debate for investors in the weeks ahead – particularly as the inflation discussion appears to be on a relatively even keel for now.

Eyeing upheaval

More hints of fund management M&A came last week from Janus Henderson’s second quarter results call – and they may ring one or two warning bells for fund selectors.

Chief exec Dick Weil said the company was taking a “hard look at organic and inorganic opportunities”, per this Ignites article. Notably, the asset manager’s results presentation says its fixed income arm – while $80bn strong – is “not yet at scale”.

For the many UK wealth managers who already use Janus Henderson bond funds in their portfolios, that’s a hint that disruption could be on the cards in the months ahead.

Get the story behind the stories
The daily newsletter for fund buyers