One of the trickiest puzzles facing allocators over the past year has been creating a cautious or defensive portfolio while faced with the twin threats of recession and inflation.
Fear of the latter drove many allocators to cut their exposure to government bonds, which was hardly the wrong call with even the MSCI US Government Bond Index showing a negative return over the past year, but a peek at the latest update to our Asset Allocator database which monitors cautious portfolios reveals allocators have been moving back towards fixed income, including govies, over the past three months.
As of the end of 2022, the average allocation to fixed income rose to 52 per cent from the previous 47 per cent.
The allocator with greatest exposure to fixed income is Invesco, at 76 per cent, followed by Charles Stanley, at 70 per cent.
At the other end of the distribution, City Asset Management has just 23 per cent in fixed income. This makes a lot more sense in the context that all of City AM’s portfolios are run with inflation-plus targets in mind.
Liontrust has the next lowest at 28 per cent.
When it comes specifically to government bond exposure, CityAM continues the theme by having just 2.3 per cent allocated there, while Liontrust has 2.8 per cent.
The allocator with the greatest exposure to government bonds in their cautious portfolio is Handelsbanken, at 34 per cent, a figure which is almost three times higher than the average exposure of 13 per cent. The next highest in a category with a very wide dispersion is 7IM, which has 22 per cent in government bonds.
There has also been an increase in the level of exposure to bonds in the income portfolios we monitor, though the increase here is more moderate, moving from 31 to 33 per cent over the past three months.
Once more, Invesco has the largest exposure here at 58 per cent, followed by Handelsbanken at 45 per cent.
Among those least keen on bonds in their income portfolio are Iboss at 25 per cent and Hawksmoor at 28 per cent, but the absolute lowest allocation is held by Wise, at 15 per cent.
As with cautious portfolios, this increase has been driven by a bigger allocation to government bonds.
Many of the firms least keen on this asset in their cautious portfolios hold the same view in their income mandates, with Liontrust owning just 3.3 per cent in their income portfolio.
But they are not alone in this negativity, with Close Brothers holding just 3.4 per cent.
2023 has begun with a rally in bonds and equities as investors start to revise their inflation and interest rates expectations against a slightly more optimistic backdrop.
But such optimism is the garlic of the bond markets, so all of those allocations may move rapidly as the year progresses.