A few weeks ago you may have seen our article about potential group think among DFMs’ choice of equity funds.
We were curious to find out whether DFMs’ equity allocations are increasingly converging around a handful of trades, so this time out we thought we’d run the same test for fixed income products.
Running the numbers once more, we discovered that allocators are more heavily centralised around short-duration bonds than any other part of the fixed income universe.
The five most popular short-duration bond funds comprise 51 per cent of DFMs’ total holdings, which is significantly higher than the 38 per cent seen in the strategic bond universe, and the 36 per cent seen in corporate bonds.
Allocators are hovering around two short duration bond funds in particular: Royal London Short Duration Gilt fund appears in seven portfolios and has picked up two new buyers this year; alongside the L&G Sterling Corporate Bond Index, also owned by seven houses, though this mandate saw three sales across 2023.
As there are fewer funds to choose from here, we used the top five holdings of a given asset class to determine high exposure.
This explains why we excluded some bond sectors from the chart below, because these sectors are so concentrated that there would not be much to learn here.
For example there are only 13 gilt funds in our database and the top five of these funds account for 79 per cent of all holdings - with Vanguard UK Government Bond Index the most popular.
With index-linked bonds there are only 16 funds in our database and the seven most popular account for 75 per cent of all holdings, with L&G Global Inflation Linked Bond Index the most popular.
Short duration government bond funds are often viewed as volatility dampeners or to provide liquidity, rather than being return seeking assets in their own right, so it's perhaps not surprising there is a paucity of choice here.
In the corporate bond and strategic bond spheres, allocators have enjoyed more room to differentiate their picks, with just almost two-thirds of their choices differing from their contemporaries.
This has paid off: last month, Asset Allocator illustrated the relative success among managers have had in picking actively-managed fixed income funds, with 33 per cent of DFMs’ corporate bond picks found to be delivering top-quartile returns across a three-year period.
We’ve also been keen to find out how allocators are feeling about the prospects for different asset classes, and the most recent pulse check, conducted in December, suggests a sense of optimism for our bond buyers through 2024.
70 per cent of the DFMs we cover are optimistic on bonds in general, with just five per cent expressing a negative sentiment on the asset class.
By some way the most popular area of fixed income going into this year is found in government bonds – two-thirds of allocators are positive here.
DFMs’ buoyancy is also reflected in their actions: average fixed income exposure across the sector now stands at 29 per cent, the highest it has been for some time.
