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Asset Allocator

from Asset Allocator

Captain Caution

To repeat one of the overused tropes at times of market turbulence: 2022 has been an 'interesting' year.

So we thought we would have a look at DFMs' most risk-averse portfolios to see where allocators are looking for defensive assets and what else we can learn.

Our research shows the average equity allocation in a cautious mandate was 23 per cent, though there was a huge amount of variation here.

Rathbones holds a stonking 47.5 per cent of its cautious mandate in equity funds while at the other end of the spectrum Wise has just 5 per cent and Invesco 9.5 per cent. 

We have previously mentioned that in balanced portfolios home bias seems to be fading away, with UK equities and US equities broadly on par. The same is true in cautious portfolios despite the fact the UK market could be seen as a more cautious bet, suggesting this trend is a feature, not a bug.

The average exposure to UK equities is 6.8 per cent while the average exposure to the US is 6.3 per cent. 

One surprise from the data is that global equity funds represent only 3 per cent of the capital in the cautious funds of the DFMs we cover.

A major topic of debate among investors right now is what role bonds can play in a defensive portfolio at a time when volatility in the asset class is acutely high. 

Our database shows the average allocation to fixed income in cautious portfolios is 47.5 per cent. 

As ever, there are significant divergences between the different models, with Invesco having 75 per cent in the asset class, followed by M&G Wealth with 73 per cent. Meanwhile at the lower end Close Brothers and Liontrust had 28 per cent allocated.

In terms of where the fixed income exposures are focused, allocators have a preference for investment-grade corporate bonds where the average allocation is 14.5 per cent.

This is followed by government bonds where the average allocation is 11.6 per cent.

Handelsbanken has a 34.6 per cent exposure to government bonds of which, despite the recent volatility, 32.6 per cent is in gilts.

Regular readers will know we keep a keen eye on the growing part of DFM portfolios which is made up by alternatives, and the average cautious portfolio has a 12.5 per cent exposure to assets such as absolute return and hedge funds.

There are also some weighty cash holdings, including Iboss's 30 per cent, LGT's 19 per cent and…wait for it…Liontrust's 52 per cent. This gives an average cash holding of 10.4 per cent.

At the time of writing, markets have been moving upwards in the wake of softer than expected inflation data in the US. If that continues then it may dent investor appetites for cautious investments, but we will continue to revisit this part of our database in the coming months.

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