With wealth managers now looking ahead to the rest of the year, many of the risks they have had to navigate are still evident.
Inflation remains at multi-decade highs, central banks are raising rates, and markets around the world are still nervously anticipating recessions. The US has now technically tipped into recessionary territory, following a surprise 0.9% GDP contraction in Q2, according to figures from the commerce department.
Wealth managers will obviously have a longer-term focus than the rest of 2022, but many are already changing their clients’ portfolios in anticipation for the next six months.
An emerging theme seen across wealth managers’ portfolios is a lower appetite for risk. Given the macroeconomic challenges in the air, many investment managers are actively reallocating away from risk assets, such as equities, and into safe-haven holdings. This is the case at Brewin Dolphin where equity positions have been lightened from overweight to neutral.
“This is in view of a more challenging economic environment and tighter monetary policy,” says Janet Mui (pictured), the firm’s head of market analysis. “We have positioned our portfolios more defensively and toward more quality exposure.”
Government bonds no longer uninvestable
Evelyn Partners is another firm becoming more defensive, and head of multi-asset funds Ben Seager-Scott has been taking advantage of market sell-offs and reintroducing government bonds for their defensive qualities.
“The sell-off in government bonds means this asset class has come in from the cold after many years of being essentially uninvestable for us, so we have started to dip our toe back into conventional duration, while keeping low-duration exposure to credit,” says Seager-Scott.
“We’re also retaining our gold position, which can act as a shock absorber. And we continue to favour alternatives over broad fixed income exposure, especially absolute return funds, which have really proven their worth so far this year, and we are confident they can continue to do so.”
Fixed income is being viewed similarly across the industry, with positions being established in anticipation for further volatility. At Charles Stanley, strategist Benedict Tottman says the firm has held an underweight duration view with positions at the short end of the curve.
“We continue to hold this view at the current juncture, but are monitoring for opportunities to extend duration positioning,” says Tottman.
“Spread exposure has been becoming more attractive given the widening seen over the past few months. We have seen a heightened level of spread volatility and are monitoring for a favourable entry point to increase allocations to high yield credit, which we believe could soon represent.”
See also: Will attractive yields entice investors back into investment grade credit?
Cash and other opportunities
As part of wealth managers’ shift into defensive territory, cash reserves are being built up at many firms. This has not only allowed equity risk to be reduced but means investment managers can take advantage of opportunities when they arise.
Stuart Clark, portfolio manager at Quilter Investors, is deploying this tactic for the WealthSelect portfolios he helps oversee: “We have been running a higher cash load in the portfolios for some time at the expense of traditional bonds and allowing us to have risk budget spent in other asset classes we viewed as more attractive.”
“Recently, we reduced equity and at the same time reduced cash to buy government bonds to maintain the overall level of expected risk.”
See also: Ruffer enters ‘crouch mode’ and slashes equity exposure ahead of ‘dangerous’ H2
The approach differs elsewhere. At Charles Stanley, Tottman is ensuring he has defensive exposure across cash, ultrashort government bonds, short dated investment grade credit and infrastructure.
Meanwhile, Evelyn Partner’s Seager-Scott is compounding his favoured themes: “We’re not taking money out, but rather ensuring we’re rebalanced, topping up high conviction positions that have been caught up in indiscriminate selling, and ensuring we have a balance that includes more defensive areas as well as long-term quality.
“It makes sense to ensure portfolios have exposure to more defensive areas that can weather potential storms, particularly areas such as utilities and healthcare, as well as dividend-paying equities. A lot of bad news is already baked into prices and the earnings season offers an opportunity for investors to refocus on fundamentals.”
The sentiment of the industry is clear – risk exposure has been conservatively minimised, with investment managers building up some defensive walls for a rainy day. This is taking many different forms – cash buffers, alternatives, government bonds etc – but as ever investors are clueless as to what happens next.
With inflation continuing to pile pressure on central banks, and the Russian/Ukraine conflict without an end in sight, the consensus is for recessionary conditions to hit markets within a few months. The global nature of the macroeconomic issues facing UK wealth managers has not made asset allocation decisions any easier.
“[Looking for the opportunities] in the second half of the year geographically speaking is an interesting question as I think we are in a tough environment from a global perspective,” admits Clark.
“Maybe a better way to think is to those more defensive sectors with decent yields that can underpin returns alongside alternatives exposure, rather than looking at specific regions.”
In agreement is Seager-Scott who warns it is too early to make definite calls on when the next big correction will occur, and where it may hit them.
“It’s difficult to make a strong geographical call, we tend to think more in terms of sectors and styles at the moment,” says Seager-Scott.
“For the second half of the year, we’re looking to ensure we have good balance within equity allocations across geographies, styles and sectors. We continue to believe a long-term bias to favouring high-quality companies with sustainable growth characteristics is a sensible approach to help our investors achieve their end goals.”