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DFMs take passive route for exposure to gilts and Treasuries

Bonds have been a topic of much discussion recently so we had a peek at our database to see how the allocators we cover are getting their fixed income exposure. 

And for the most part it is intuitive, with 100 per cent of Treasury exposure and 77 per cent of conventional gilt holdings being passive. 

That makes sense because of course it's hard to add much value in terms of credit risk within those asset classes so there is less for an active fund manager to do. 

But as the numbers above suggest, there are actively managed gilt funds being used with the most popular being Allianz Gilt Yield, run by Mike Riddell and owned by four DFMs.

The most popular gilt fund overall is Vanguard UK Government Bond Index, which is owned by seven of the allocators we cover, while the most popular Treasury fund is Vanguard US Treasury Index, which is now owned by a stonking 13 of the allocators we cover.

It actually picked up a net four new DFM buyers since the fourth quarter of 2022.

That fund has cornered the market for conventional Treasuries among DFMs, with no other fund being owned by more than one of the allocators we cover. 

The same credit risk considerations apply with index linked bond funds, and the most widely owned here is L&G's Global Index Linked Bond fund, which appears in seven of the portfolios we cover. 

That fund has had a net two new buyers since the start of 2023. 

There are nine active index-linked bond funds used in our database but none are owned by more than one or two DFMs.

Our allocations database shows that despite market expectations around the inflation outlook having shifted rapidly over recent months, the average exposure to linkers hasn't moved over the past three quarters, remaining at 2.32 per cent. 

In the corporate bond space, around two thirds of the allocations among the DFMs we cover are to active funds. 

The average exposure to investment grade funds among the balanced portfolios of the allocators we cover is 8.5 per cent. 

The house with the biggest overweight here is Progeny at 24 per cent, while Premier Miton have 21 per cent. 

At the end of the distribution, Brooks Macdonald has zero allocated to investment grade funds.

As our table above shows, the bond sector with the highest proportion of active management is high yield, and this is a trend likely to become more pronounced as the much discussed refinancing cycle begins to impact default rates in the high yield market. 

The most widely owned high yield bond fund among the allocators we cover is now Axa US Short Duration High Yield, which is owned by five of the allocators we cover. 

Although the fund picked up a couple of new buyers in 2022, its place at the top of the pile is as much the result of a sell-off among allocators to the Baillie Gifford High Yield fund, which was the most owned in this sector when we began to build the database in 2018, but having been sold by four DFMs in 2022 is now held by a solitary allocator among the providers we cover.

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