Wealth managers increase exposure to global bonds

Rebalanced twice a year, the AFI indices provide a unique snapshot into how wealth managers across the UK are positioning their portfolios and selecting funds for investors with different appetites for risk – aggressive, balanced and cautious.

Across the three profiles, IA Global Bonds were seen as an area of opportunity – with an increase of 3.14% for FE AFI Aggressive; 2.58% for FE AFI Balanced; 2.14% for FE AFI Cautious – reflecting a desire for wealth managers to reduce their clients’ exposure to Sterling, which has depreciated in value as the prospect of a no-deal Brexit becomes ever more likely.

Chris Wise, Director at Whinchat, said: “We have increased the exposure to international markets, such as the US, given the opportunities for growth and, at the same time, it diversifies some of the currency risk, in terms of exposure to sterling, which may or may not weaken further due to Brexit.

“We have also included exposure to Inflation linked assets, through bonds and property. While inflation is low at present, having an inflation hedge in the portfolio for clients is important, as some active managers may not consider these investments, due to the possible longer time scale needed, for the potential returns to be generated.”

The shift towards a more global outlook continues the trend from February’s rebalance, which saw advisers moving their portfolios away from a concentration in UK smaller companies and property. In this latest AFI rebalance, IA UK Smaller Companies and IA UK Direct Property saw falls of -1.64% and -1.14% respectively for AFI Aggressive, while for AFI Balanced, IA UK Direct Property fell by 1.96% and IA UK Smaller Companies by 1.71%.

Oliver Clarke-Williams, portfolio manager at FE, said: “The effects of wider political uncertainty and growing fears of a no-deal Brexit seem to have underpinned much of the AFI panellists’ thinking in this latest rebalance. With the 31^st October deadline for Brexit fast approaching, wealth managers are clearly reviewing their positions and trying to avoid being stuck in those investments which are likely to be most affected. We saw similar moves against physical property in the wake of the 2016 referendum, where many property funds were forced to shut, as they could not meet redemptions.

“Similarly, with the IA UK Smaller Companies sector, the reduction in exposure is most likely due to the political risk of a no-deal withdrawal. This is one of the sectors which would likely be hit particularly hard. Unlike large cap UK equities, they would not benefit from a potential currency depreciation and the prospects for the UK economy would be seen as poorer.”

However, despite the ongoing uncertainty surrounding Brexit, many believe there is still opportunity to be found in the UK and in the equities sector.

Samantha Owen, Director at Beckett Asset Management, said: “We have perhaps gone against the grain a little bit in that we have slightly increased our exposure to UK equities. While there could be a lot of fluctuation in the short term, there is a great deal of potential in the medium to long-term and the valuation is too good to ignore. That said, we have not concentrated in any particular area and have maintained a mixture of multi-cap holdings.

“While bonds have traditionally been a safe-haven in times of uncertainty, yields remain low, so the best safeguard for investing against volatility remains diversification.”

Across the 15 adviser groups who form the panel, 60 new funds were selected for inclusion in the latest rebalance, while 51 were removed.

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Notes to Editors

About the AFI

Every six months, FE collects fund and asset allocation recommendations from its exclusive panel of advisers and wealth managers to suit high, medium and low risk investors.  These allocations – drawn from current advice given by panellists to their own clients – are amalgamated into the FE AFI Aggressive, FE AFI Balanced and FE AFI Cautious indices.

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