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The value of everything; Flows suggest search for port in a storm

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The latest episode of the Asset Allocator Podcast is out now. James Mee, co-head of multi-asset at Waverton, joins us to discuss inflation, real assets and why he's worried about sterling appreciation.

To listen find us on SpotifyAcastApple Podcasts and most other podcast platforms.

Downward Arc

The average private client portfolio managed by discretionary fund managers in the UK was down 4.1 per cent in the first quarter of 2022, according to research from Arc Risk Consultants. 

The data was compiled by examining more than 300,000 portfolios run by more than 100 managers in the UK.

Unpicking the data provides a snapshot of where markets were at that time, with managers in the "steady growth" portfolios as categorised by Arc.

The steady growth category roughly equates to the 60/40, balanced portfolio. 

The data reveals that around 30 per cent of the managers in this category were able to move from bottom to top quartile in performance terms during the quarter as a result of the shift between growth and value stocks. 

As a result 26 per cent of the portfolios which had been top quartile moved in the opposite direction.

In all, value beat growth by nine percentage points in the quarter, though the rising tide of worry around the outlook for global growth means the cyclical nature of many value stocks will be at a disadvantage when the second quarter data is compiled. 

Traditional safe havens offered no solace during the quarter, with even a deeply cautious portfolio with equity exposure of a maximum 40 per cent losing 2.6 per cent - perhaps because the only area where the bloodbath was worse than among the growth equities was in the bond market, demonstrating that while bonds and growth equities are highly correlated, value equities can continue to offer diversification. 

The challenge, as mentioned above, comes when high inflation decimates bond exposure, but downward revisions to GDP hurts value equities. 

It may be that as the rest of the year unfolds, the sea of red which swept across many allocators portfolios in Q1 leaves the more value oriented portfolios washed up.

The world is not enough

The latest flows data from the Investment Association shows investors are responding to the current uncertainty by fleeing anything which smells like fixed income and embracing the mixed asset sectors.

This is perhaps an admission among retail investors that trying to build your own portfolio in a stagflationary world is a fool's errand.

The worst performing sector in terms of flows in March was Sterling Strategic Bond, which had outflows of £528m.

The appeal of this sector is supposed to be that it can "go anywhere" in the bond market, with managers unconstrained by sub-sectors. The fact the exodus from fixed income is so complete that even Strat Bond funds are out of favour is testament to the dark place markets are in at the moment.

The Mixed Investment 40-85% Shares sector was the best selling, attracting net new money of £579m.  

The best performing fund in this sector over the past 12 months is Orbis Global Balanced, which has returned 12 per cent over the past year, and is not held by any of the allocators on our database - though Orbis has a slightly unusual charging structure, which might be one of the reasons for this.

Orbis has been vociferous in its view that value would have its day in the sun, and that seems to be paying off in performance terms.

The worst performer in the sector over the past year was, perhaps unsurprisingly given the current rotation, the Baillie Gifford Managed fund, run by a firm whose belief in growth is stronger than Edinburgh’s Castle Rock - so the mere trifling matter of a bit of inflation will hardly shake it.

So does this reflect what DFMs have been up to lately?

The earliest data from the recent update to the Asset Allocator database suggests the answer is: up to a point.

The average equity holding has gone down by about 1 per cent to 57 per cent, while the average fixed income holding has also gone down by about the same amount.

The beneficiary of this has been alternative investments.

Now of course the caveat here is that these movements may be due to the markets rather than active portfolio manager decisions.

But we have previously discussed the increasing popularity of alternatives. Well, they are now on the cusp of breaking through the 20 per cent threshold, perhaps benefitting from the current turbulence.

Another issue we have recently discussed is whether inflation will spur more investors to consider Japan and while DFMs have kept their allocation to this country stable, it was the second-best selling equity sector in March.

Policy makers in Japan remain committed to keeping monetary policy loose to stimulate economic growth even as China (a source of demand for Japanese goods) slows. This places the Japanese equity market on a completely different path to those other developed markets and may be the last thing left resembling a haven trade.

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