Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.
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The concentration game
Just as managers don’t want to hold too much in a particular stock, fund selectors are keen to ensure they aren’t overly concentrated.
The rules are a little different for the latter group - in many ways, there aren't any actual rules. Regardless, fund buyers share similar concerns to fund managers, ranging from overreliance on single positions to liquidity concerns and so on.
So we took a closer look at wealth portfolios to see how position sizing stacked up.
In short, for those who have an active fund as their top holding, the average size is 6.8 per cent of a moderate portfolio, with those at the top of the spectrum stretching to - but not beyond - the 10 per cent mark.
For passive funds, averages are higher and the upper limit is around 15 per cent, though some go further still.
What of the kind of funds being chosen? US equities’ dominant place in portfolios makes them a popular pick for concentrated bets, be they passive or active.
Other buyers have a different kind of mainstay: UK equity income. That’s reflected in the fact that Artemis Income is the single highest fund weighting in 10 per cent of all balanced portfolios.
Not everyone is quite so conservative. We’ve spoken before about high-yield bonds funds’ relatively limited role in DFM portfolios. But when these bets are made, they’re often big ones.
One in ten balanced portfolios in our sample have a high-yield bond fund as their top holding. Add to that the few who have HY-heavy strategic bond funds at the top of their exposures, and it’s clear that portfolio structures are still providing plenty of room for bolder calls.
Sticking with it
As we noted in Tuesday’s newsletter, value funds’ prospects are looking rosier in the context of rising bond yields. Yet for all that growth stocks have suffered, it hasn’t been completely plain sailing for value, either.
Morgan Stanley’s European equity team point out this morning that “the relative performance of high-beta cyclicals and value continues to lag the move up in bond yields”.
They aren’t the only ones to make that point in recent days. The thrust of the matter in both cases relates to the wider macro picture: whether the economic backdrop proves stagflationary or simply reflationary.
Discerning the difference between the two will likely prove particularly challenging – which is unfortunate, as it could have a particular impact on equity market performance.
As Morgan Stanley’s team say: Higher-for-longer inflation against a backdrop of solid growth should favour financials and cyclicals. In contrast, stagflation would favour defensives and high pricing power stocks.
Once again, wealth managers’ favoured equity strategy for 2021 – taking a barbell approach between growth and value – looks most prudent at this juncture. The downside scenario, in which all equities fail to perform for a given period of time, is when the rest of the portfolio would have to pull its weight.
The biggest trend in asset management merger and acquisition activity is increasingly taking place away from these shores. In the latest example, Franklin Templeton today agreed a deal to buy O’Shaughnessy Asset Management.
The latter isn’t a household name over here, and by US standards its AUM is pretty meagre at $6.4bn. Crucially, however, the WSJ highlights that $1.8bn of that is held via a custom indexing arm.
It’s this business line that’s proving irresistible for fund giants at the moment. The ability to go bespoke is particularly crucial in the age of ESG. Given their heritage, wealth managers will feel they’re already very well positioned to take advantage of this particular trend.