How DFMs have reacted to the pandemic

For a period of time, even the vast US government bond market suffered liquidity problems as investors fled anything that wasn’t cash.

Peter Toogood, chief investment officer at the Embark Group, described the events of March as “GDP stopping”, and in such unprecedented conditions, investors felt unable to price most assets, meaning even 'safe haven' assets were under pressure.

In economic terms Covid-19 represents an exogenous crisis: that is, a crisis and recession caused by events outside of the economic or financial system.

Historically recessions caused by such events tend to be worse than normal recessions, but are also over much sooner. 

But while the fate of the global economy is highly uncertain, many asset classes have already bounced back.

Central bank intervention aided government bond market, causing prices to soar. The extra liquidity then percolated into equity markets, and many shares recovered losses almost as quickly as they were incurred.  

But despite the waves of intervention from central banks and governments, in the weeks following the March meltdown, markets have become transfixed by updates on the spread of the virus as much as economic data. 

Asset allocation calls

Dan Fasciano, managing director of BNY Mellon Wealth Management, believes the market moves are pricing in a better scenario than is thus far apparent, making him wary of many mainstream asset classes. 

Wayne Berry, investment manager at Brewin Dolphin, is among those who has moved away from the “lower risk” assets such as government bonds, which have performed well since March, and instead is buying equities. 

He says: “We have recently switched more money out of government bonds - gilts and US treasuries.

"In keeping with the stated risk profiles advisers ask us to adhere to, we have taken advantage of the higher prices in safer assets and reallocated to equities – mainly in the US, Japan and Far East. With this in mind, we are now underweight in gilts relative to the benchmark and overweight equities, which has so far served us well during the recovery.”

Mr Fasciano is also cautious on the outlook for government bonds following their recent rally, but says he will always own some in a portfolio as they are “ballast”, due to typically performing well when other assets fall in value. 

He believes this balancing effect happens regardless of the price of the bonds - though he does believe the price of the bonds is too high to make them a good investment in other circumstances. 

Tom Sparke, investment director at GDIM, a discretionary fund manager, says with so much uncertainty in the world, “risk is hard to price right now”, and as such, he is adopting a conservative approach. 

He adds that the portfolios he manages are usually run in a conservative way, so his current asset allocations are not a major deviation from the norm. 

Evangelos Assimakos, investment director at Rathbones, says that even those investors who have not made significant changes to their portfolios in recent months will be thinking about the implications of recent developments.

He says: "The majority of DFMs have not deviated from their standard asset allocation practices during the current climate. However, there is now an increased focus on the potential risks within a number of asset classes. The current climate has meant that DFMs must consider the risks of fixed income investing at a time of negative interest rates as well as the widening gap between growth and value among stocks.

"In a time of elevated volatility, low rates and waning fiscal discipline, DFMs are increasingly turning to gold for its long-standing qualities as a store of value that cannot be easily manipulated or devalued. Many DFMs are also holding onto slightly higher levels of cash – a sign that many don’t consider that we’re ‘out of the woods’ yet as far as the virus and economic fallout from Covid is concerned.”

Alex Harvey, co-head of research at investment house MGIM, says central bank action have protected the returns available from safe haven assets. His firm has recently sold some equity and riskier bond holdings in order to buy alternative assets and products that protect against inflation. 

Equities

Within equity markets, the stocks which have done best since March have been those which are less economically sensitive, such as Unilever, or big tech companies which are growing quickly.

The stocks which have done less well are those which are most closely linked to the performance of the wider economy.

That has been the pattern in equity markets since the global financial crisis, and Chris Holdoway, investment director at Albemarle Street Partners, believes the economic effects of Covid-19 mean that this pattern will continue for some time to come, with economically sensitive investments destined to under perform.