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Asset Allocator

from Asset Allocator

Grade inflation

As 2023 looms onto the investor horizon, the question of how to generate an income which competes with inflation will doubtless be at the forefront of allocators' minds. 

With that in mind, we have had another peak at our Asset Allocator income database. 

Investment grade bonds may seem an intuitive trade right now, given default rates in this part of the market tend to be less than 2 per cent, while yields are presently above 6 per cent in aggregate. 

Our database shows there hasn’t been a significant increase in the allocations to investment grade over 2022, being consistent at 11 per cent.

That average is skewed meaningfully by Invesco having 33 per cent, while the next largest overweight is the 25 per cent which is allocated by Rathbones within their income model portfolios. 

Both Rathbones and Invesco have trimmed their allocations over the course of the year by around 1 per cent. 

At the other end of the spectrum, Hawksmoor and Wise have zero allocated to IG funds.

Hawksmoor has opted for a combination of strategic bond funds, convertibles and asset-backed securities while Wise opts just for strategic bond funds. 

The most widely owned non-ESG specialist corporate bond fund among the allocators we cover is Artemis Corporate Bond, which is held in five portfolios.  

This is a £924mn fund run by Stephen Snowden. The portfolio has 44 per cent allocated in the bonds of financial companies, those assets would be expected to do well as interest rates rise. 

Another 14 per cent is allocated to asset and mortgage backed securities. 

There are also some allocations to cash and government bonds. 

The fund is ranked third from 97 funds over the past three years, though it has still lost money in that time.

TwentyFour’s Corporate Bond fund and Fidelity Sustainable Moneybuilder Income each appear in four portfolios. 

The TwentyFour fund is £150mn in size and has lost 10 per cent over the past three years, while the Fidelity fund is over £2bn in size and is bottom quartile over one, three and five years. 

Asset Allocator recently had a chance to catch up with Sajiv Vaud and Kris Atkinson, who run the Fidelity mandate. 

They say they expect inflation to fall materially next year, and that the bulk of capital gains from bonds may have been made in this cycle, so they are more focused on the income generation from the market in 2022.

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