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Asset Allocator

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Wealth firms' alternative assets under the microscope; DFMs fan out for diversification quest

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Alt shift

As per our discussion on bonds yesterday, diversification remains the watchword for those running wealth portfolios. Of course, their asset allocations have long since moved beyond fixed income to incorporate a variety of alternative assets. Yet deciding how to pick funds in these areas is arguably even tougher.

The chart below shows how Balanced portfolios allocate to alternatives as of this summer. The most common options remain multi-asset, absolute return or hedge funds of various stripes, but real assets are an increasingly important part of exposures, too.

In recent years there’s been a well-publicised shift away from some of the multi-asset absolute return offerings that were once so popular. Yet the continued popularity of the likes of JPM Global Macro Opps, or Ninety One Diversified Income, shows there’s still room for both absolute return offerings and funds that take a slightly more traditional multi-asset approach.

Similarly, when it comes to property and infrastructure, there’s still plenty of appetite in both cases. For obvious reasons, very few discretionaries now hold open-ended property funds. In their stead, a combination of investment trusts, property securities, and fund of funds that hold both physical assets and securities have served buyers well.

It’s a similar tale for infrastructure, where exposures can take the form of either physical or listed equity funds – the former, again, typically via the investment trust structure.

Other areas have proved a tougher sell, however. non-precious metal commodities remain a rarity in moderate portfolios despite the rally seen over the past nine months.

An alternative take

Clearly, the above figures don’t tell the whole story. The chart indicates a wide range of relatively limited exposures. In reality, rather than being the result of small position sizing, this scope is a result of the many different ways DFMs build their alternative positions.

The average wealth portfolio has exposure to just three of the asset classes mentioned above, with the typical total exposure coming in around 14 per cent. Some combination of real assets and hedge/absolute return funds tends to be the most common. But there’s very little common ground when it comes to the precise areas in which discretionaries invest.

The second chart below puts this in more context. It uses the same asset classes as in chart 1, this time focusing on how many different portfolios take exposure to each.

Only the ‘other hedge fund’ category – a group that excludes long/short funds and strategies with an explicit absolute return focus – is utilised by more than half of all wealth managers.

This chart also reveals other quirks. Chart 1 shows real estate funds are more popular than infrastructure – but chart 2 indicates more DFMs tend to include the latter in their portfolios. The reason for the difference is that real estate funds are held in larger weightings.

By contrast, while gold is found in more than 40 per cent of Balanced portfolios, its average position size is a relatively low 1.5 per cent.

That will be of some solace to holders given the way in which the precious metal slumped again last month. But the overarching point remains the same: in contrast to equity markets, there’s little consistency to how discretionaries employ alternatives. Tomorrow we’ll take a closer look at how fixed income exposures stack up, and see whether the same trends can be observed when it comes to the increasingly complex universe of bond funds.

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