Portfolio composition a mixed bag for DFMs; Hedge funds' year to forget gets worse

Doing the job

What did DFMs do to their investment allocations in October? As with the previous month, the answer is “not much”: on an asset class level, model portfolio weightings remained more or less untouched.

Where there is activity, opinion is decidedly mixed. Some are still paring China exposures in light of the events of early autumn; others are spotting bargains and buying back in. But in general, discretionaries are following the Cathie Wood route and taking things slowly for now.

Elsewhere, there are one or two issues causing trouble under the surface for certain portfolios. A slight underperformance of benchmarks was in evidence in October, an issue that more than one wealth manager attributed to underlying fund selections.

With growth and value performance to-ing and fro-ing, and inflation adding more complications, getting the right blend of active funds is proving tricky. That’s particularly the case in UK equities, as we’ll discuss further tomorrow.

Fund choices proved more resilient in other asset classes. In the alternatives space, two stalwarts have delivered for DFMs. The first is JPM Global Macro Opportunities, which has now posted 24 months of pretty serene rising returns.

The second is a fund remains similarly popular, despite a less consistent track record: Neuberger Berman Uncorrelated Strategies. The strategy’s relative performance has seen a notable improvement in recent weeks. Given the uncertain backdrop, that will be a welcome relief for holders.

Longing for better times

Other alternatives aren’t having the best time of it, however. Goldman Sachs’ latest hedge fund trend monitor reveals the most popular hedge fund long positions have suffered “a record stretch of underperformance” in 2021, a basket of such stocks having lagged the S&P 500 by some 16 percentage points.

The bank’s analysts say managers have rejigged their top holdings in a bid to get back on an even keel, with Microsoft taking over from Facebook as the top holding, and portfolios holding a variety of growth stocks and ‘reopening’ plays.

Some of these exposures look pretty familiar: high-multiple growth stocks remain all the rage. Companies with enterprise value to sales ratios of more than 10 times now account for a third of US hedge funds’ long books, compared with 23 per cent of the Russell 3000, Goldman says.

But barbell strategies, of the type favoured by many investors at the moment, are also in evidence: despite the above, funds are more tilted to value versus growth than they have been since 2015.

And as hedgies wrestle with how to structure their long positions, they’re facing renewed trouble on the short side: short interest for the average US stock remains at near its lowest level on record, and the biggest shorts have “rallied sharply in recent weeks”, per Goldman.

It’s perhaps not a coincidence that those rallies have coincided with a fresh uptick in retail trading activity. The issues dogging short sellers at the start of the year are far from over.

Two poles

The pandemic has led to a polarisation in investor opinion – specifically, on how much risk they’re prepared to take.

That’s the conclusion from an abrdn survey of 1,000 advised investors. It found 33 per cent want less investment risk than they did prior to lockdown, citing changes in financial priorities or a reduced capacity for loss. But some 27 per cent said they wanted more risk, in part because of their confidence in the advice they've received.

Juggling these two distinct client groups may prove a handful for some advisers – but then again, no two clients ever were the same. DFMs, for whom risk-rated portfolios are still the norm, will consider themselves to be well-equipped, too.