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Asset Allocator

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DFMs increasingly hunting for treasure among junk bonds

One of the standouts from our latest perusal of the Asset Allocator database is the marked increase in the portion of capital allocated to high yield bond funds in the balanced portfolios of the DFMs we cover in the final quarters of 2022. 

The data shows the average allocation to the asset class was 1.6 per cent at the end of May, before rising to 2.1 per cent in July, and finishing the year at 2.7 per cent.

As ever there are outliers, and the marmalade dropper in this data set is Psigma having 9.5 per cent allocated to high yield bond funds. 

That can be seen in the context of the firm having one of the highest overall allocations to fixed income at 38.5 per cent.

The firm with the highest allocation to fixed income in their balanced portfolio is Tacit, at 44 per cent, of which 7.5 per cent is in high yield funds. 

Abrdn has the next highest allocation to high yield bond funds among the allocators we cover, at 8.6 per cent. 

A whole range of DFMs have zero in high yield bond funds, including Brewin Dolphin, the Evelyn Core portfolios and Brooks Macdonald. 

Naturally enough, in the income portfolios we cover, the average exposure to high yield funds is higher, at 4.2 per cent, an increase on the 3.5 per cent it was in July. 

The firm with the highest allocation here is Handelsbanken, with 13 per cent, followed by Rathbones at 10.25 per cent. 

At the other end of the spectrum, Iboss, LGIM and Brewin Dolphin are among the firms with zero allocated to high yield bonds in their income portfolios. 

The most widely-owned high yield bond fund among the allocators we cover is Axa US Short Duration High Yield, which appears in the portfolios of five of the DFMs on our list.

Owning a fund with a short date to maturity may minimise the credit, as well as the duration, risk in a portfolio. 

That Axa fund picked up a net of two new buyers in 2022. At £866mn in size it has returned 6 per cent over the past five years, marginally outperforming the index. 

The next most widely owned high yield bond fund among the allocators we cover is Man GLG High Yield Opportunities.

This fund is run by Michael Scott, and is £334mn in size, it is the top performer from 30 funds in the sector over the past three years, having returned 20 per cent. 

The two funds have different approaches. The Axa fund seeks to provide income, while the Man GLG fund seeks to achieve capital growth.

With some signs that any economic downturn won’t be as some feared, but inflation could be more persistent, conditions could be ripe for high yield to outperform in the coming year, and we will continue to track DFM exposure.

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