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Passives jump to top of balanced portfolios during Q2’s “significant turnover”

21 August 2017

The latest Harrington Cooper Proprietary Asset Allocation Tracker shows that two ETFs are now the most popular holdings in multi-manager funds and model portfolios amid a move to defensive assets.

By Gary Jackson,

Editor, FE Trustnet

Multi-managers and model portfolios have sold out of both bonds and equities in order to boost their allocations to defensive assets like cash and gold, the latest research from Harrington Cooper shows.

Although markets in many corners of the globe are sitting at close to record highs, there are growing signs of nervousness among professional investors. The recent Bank of America Merrill Lynch Fund Manager Survey, for example, found that a net 46 per cent of global asset allocators now consider markets to be overvalued, a record high for the closely watched poll.

Furthermore, the average cash balance stands at 4.9 per cent (compared with a 10-year average of 4.5 per cent). Fund managers said they are overweight cash because of a bearish view on the markets and preference for cash over low-yielding assets.

Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, said: “Investors’ expectations of corporate profits have taken an ominous turn this year, which is a warning sign for equities over bonds, high yield over investment grade, and cyclical sectors over defensive ones. Further deterioration is likely to cause risk-off trades.”

Harrington Cooper’s asset allocation analysis Q2 2017

 

Source: Harrington Cooper

As the chart above suggests, this is backed up by the latest Harrington Cooper Proprietary Asset Allocation Tracker, which looked at the holdings of 32 balanced risk profile multi-manager funds and model portfolios at the end of 2017’s second quarter.

“The second quarter saw significant turnover in the list of popular funds held by leading UK multi-managers and discretionary managers,” fund distribution company Harrington Cooper said.

“Professional investors cut bond and equity allocations over the three-month period, rotating into cash. Allocations to bonds fell by 0.94 per cent quarter-on-quarter to an average of 24.19 per cent across the balanced models that Harrington Cooper tracks. Equity exposure dipped by 0.76 per cent to 51.86 per cent, while cash proved the real winner – up 1.59 per cent to an average of 7.27 per cent over the same period.”


There were also some notable changes in the most commonly held individual funds in the top 10s of the balanced multi-manager and model portfolios tracked by Harrington Cooper.

When the firm surveyed the portfolios at the end of the first quarter, the most popular holding was Ben Wallace and Luke Newman’s five FE Crown-rated Henderson UK Absolute Return fund while BlackRock European Dynamic, iShares Physical Gold and Polar Capital Healthcare Opportunities were in second place.

Three months later and the leaderboard has witnessed some considerable changes, as can be seen in the following table.

The most common holdings in balanced portfolios tracked by Harrington Cooper

 

Source: Harrington Cooper

This is the first time that the Asset Allocation Tracker has seen two ETFs appearing on the list – and both are at the top of the table.

As its name suggests, iShares Emerging Markets Local Government Bond Ucits ETF offers exposure to government bonds from a range of emerging market countries. Its largest geographical exposures are to Poland, Mexico and Indonesia.

Emerging market debt has seen a revival in popularity recently, thanks to the ongoing search for yield and widespread concerns that valuations are looking very stretched in the developed government bond market.

The second most common holding – Source Physical Gold ETF – backs up the view that professional investors are taking a more defensive stance. The yellow metal was recently bolstered by the geopolitical tensions between the US and North Korea.


Passives aside and Royal London Short Duration High Yield, Invesco Perpetual Tactical Bond and JP Morgan Japan were all new entrants to the list of most popular balanced portfolio holdings.

While Henderson UK Absolute Return has been knocked from first place to third overall, it remains the most common active fund. The £2.3bn fund has two FE Alpha Managers at the helm and has established a strong following on the back of its track record; over the past five years it has generated a 42.65 per cent total return.

Performance of fund vs sector over 5yrs

 

Source: FE Analytics

Royal London Short Duration High Yield, which is managed by Azhar Hussain, again shows how professional investors are increasingly moving into riskier parts of the bond market to bolster yields. However, its short-duration approach mitigates some of the risk involved with this – the fund has an FE Risk Score of just 8, compared with 100 for the FTSE 100 and zero for cash.

Paul Causer and Paul Read’s £625.9m Invesco Perpetual Tactical Bond fund is another relatively cautious offering. While it has lagged its average IA Sterling Strategic Bond peer over the past three years, it has been one of the least volatile members of the sector.

The final new entrant to the list – Nicholas Weindling and Shoichi Mizusawa’s JP Morgan Japan fund – is one of the IA Japan sector’s strongest performers over the past three and five years. It is one of the more volatile members of the peer group though.

Its appearance on the list supports the view that professional investors are wary of valuations in areas such as the US. Indeed, Japan is seen as one of the remaining pockets of value in developed markets and the Bank of America Merrill Lynch Fund Manager Survey found that allocation to the country jumped from a net 1 per cent overweight in June to a net 20 per cent overweight in August.

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