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Asset Allocator

from Asset Allocator

Starting point

We thought a good place to start the first proper business week of 2023 would be to look at where DFMs are allocated across their balanced, income and ESG portfolios.

As the chart below shows, around 14 per cent of the capital deployed by DFMs in balanced strategies is in US equities, while that market’s reputation for being a comparatively barren hunting ground for dividend focused investors probably explains why just 10 per cent of the capital of the income portfolios we cover is deployed on Wall Street. 

In contrast, UK equities find an almost equal representation in the balanced, income and ESG portfolios, each accounting for 15 to 16 per cent.

Asset Allocator suspects the reason for this is the value bias of the UK market helps the balanced portfolios achieve equity diversification while the prevalence of traditional income-paying sectors such as oil and mining in the UK market ensures a strong representation in the income portfolios. 

The same factors may be at play in the almost equal representation of government bonds in those portfolios.

One of the great unanswered questions around ESG investing is how to achieve diversification in a space where capital is necessarily deployed in a small number of sectors such as energy, and in companies that tend to be at a relatively early stage of development.

As our data below shows, the DFMs we cover are taking the simplest approach to squaring the circle by buying global funds, ensuring at least some of the asset allocation is taken care of by someone else.

The substantial weighting to UK-listed ESG stocks may be a function of greater knowledge around the pedigree of UK early-stage companies. Which is arguably a polite way of describing home bias. 

The 16 per cent allocation in ESG model portfolios is more than twice the level held within the balanced and income portfolios we cover.

We will of course monitor how all of these allocations change as we go through 2023.

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