A glance at our DFM sentiment indicator data shows the allocators we follow are deeply uncertain about the outlook for alternative assets, with neutrals prevailing across the board.
Infrastructure and commodities are the areas where this is most pronounced, with 60 and 65 per cent respectively being neutral, though only 5 per cent are outright negative on infrastructure, compared with 13 per cent on commodities.
Our allocations database, which looks at what allocators have been doing rather than just sentiment, indicates a drop of about 10 basis points in the average exposure to commodity exposure over the course of 2023, to 40 basis points, as compared to 50 basis points at the start of the year.
It’s worth noting here that many DFMs don’t include commodities as a permissible investment.
The sentiment indicator shows little love for property as an asset class, with just 5 per cent positive and 42 per cent negative.
Our allocations database shows the actual allocation to property funds is around 5 per cent, and largely unchanged over the past year, despite being a year in which sharp rises in interest rates upended markets.
As one DFM put it to us: "Property still offers a reasonable yield pick-up compared to other asset classes, as well as some protection against inflation. However, there is also uncertainty surrounding several property types in a post-Covid world: the anticipated demise of the office and high street retail sectors could be overstated but current pressures on tenants will have long-term repercussions."
Few assets have had such a volume of slings and arrows flung at it over the past few years as absolute return funds as performance has largely underwhelmed and the opacity of some elements of the investment process put some investors off, but the DFMs we spoke to for the sentiment indicator were far less negative on these instruments than might have been expected, with the same proportion (26 per cent) being positive as negative.
One DFM expressed their feelings thusly: "Well-chosen absolute return vehicles can be a useful diversifier to overall portfolio risk, thanks to their low correlation with traditional asset classes. But we believe that they are unlikely to keep up with ultimate safe havens such as government bonds in times of market duress."
Glancing at the absolute return funds owned by the allocators we monitor, it’s hard to see a clear pattern.
The mandates launched at Aviva and Invesco by those who had previously worked on Abrdn’s once celebrated Gars fund have found no particular favour among DFMs.
Instead the most owned alternative fund among the DFMs we monitor is Neuberger Berman Uncorrelated Strategies which is owned by eight of the allocators we cover, while TwentyFour’s Absolute Return Credit Strategy is owned by seven DFMs, with one having sold the fund earlier this year.
Janus Henderson’s long-established absolute return fund is owned by five of the allocators we cover, but momentum is moving in the wrong direction right now, with a net of three sellers in 2022, and a further one this year so far.
It’s not immediately obvious why since the fund, which remains over £900mn in size, is ahead of the sector on a one and five year time horizon.
It may be the fund has been caught up in the general negativity towards its sector in the wake of the collapse of Gars, with this fund being seen as too close to that type of strategy, at least relative to the Neuberger Berman and TwentyFour funds mentioned above.
