Natixis Global Asset Management has found UK managers of risk-rated model portfolios were reducing equities in favour of alternatives in Q1 2017, amid political concerns in the US and Europe.
In the latest UK Portfolio Barometer, which measures 97 ‘conservative', ‘moderate' and ‘aggressive' portfolios from 26 firms in the UK between 1 January and 31 March 2017, it found overall the model portfolios had shifted away from equities while upping weightings in absolute return, certain areas of fixed income and UK property.
In the conservative portfolios, equity risk was reduced, particularly in the emerging markets space, in favour of real assets, alternatives and fixed income.
The report noted the move into real assets was predominantly UK property, a signal that investors are returning to this sector after the liquidity restrictions imposed last summer.
In moderate portfolios, equities were reduced in favour of multi-alternative and targeted absolute return funds. It also said within the latter sector, model portfolios were moving out of the sector behemoths and into "smaller but like-minded competitors".
Within portfolios labelled aggressive, there was a rotation from emerging market equities to North American equities on the back of US President Donald Trump's promises of tax cuts and a fiscal boost.
The Barometer found Trump's review of the Dodd Frank Act, which would deregulate investment bank's trading activities, and his a request to Congress for a fiscal boost of $1trn, potentially leading to infrastructure spending and other projects, were the key factors for an increase in allocation.
James Beaumont, international head of the portfolio research and consulting group, at Natixis, said: "These [events] tended to overshadow negative events such as continued investigation into Russian involvement during the election campaign; the change in stance on Obamacare and the temporary travel ban imposed to name a few."
Furthermore, the report said investors' risk-off stance was largely due to heightened political risk in Europe, amid several elections in the region, and an element of profit taking after strong performance in equities.
Beaumont said: "Given the recent political risks associated with elections in some EU states we would have expected greater volatility in equity markets.
"In the absence of significant volatility, we do not think that the equity market has been complacent, rather that the volatility is being expressed in other asset classes."
The report said this had most been seen in the fixed income space as a "secular" change in interest rate policy in the US, which could be followed by the UK and Europe provided growth and inflation remains resilient.
Despite this, fixed income vehicles were popular during the period.
Andrew Kinsey-Quick, senior portfolio consultant at Natixis GAM, explained: "Given the backdrop of greater volatility in fixed income we were surprised to note an increase over the quarter of flows into fixed income, specifically into UK and UK-biased fixed income funds."
However, model portfolio managers were being selective with their bond choices targetting particular strategies; floating rate bonds are attractive in higher volatility periods particularly when interest rates are rising, while index-linked bonds perform when economies are experiencing healthy growth coupled with "reasonable" inflation.
"The data highlights that funds with the largest inflows employ strategies that are either exposed to floating rate or index-linked bonds, and funds with the largest outflows employ strategic bond or high yield investment strategies."
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