Model portfolios shed fixed income amid rate rise fears

Portfolio-Bonds-Fixed-Income-Performance-UK-700x450.jpgAdvisers are increasingly shifting their fixed income positions from pure bond funds to cautious multi-asset funds as the outlook for the asset class remains uncertain, a new study finds.

The analysis of model portfolios from Natixis Global Asset Management found that many advisers cut fixed income allocations in Conservative and Moderate risk portfolios and reallocated the assets to cautious allocation funds, believing these would respond more quickly to changing market conditions.

Conservative portfolios, in particular, saw the biggest switch, with advisers cutting allocations to fixed income funds by 7 per cent on average, while Moderate portfolios cut fixed income by 6 per cent, the study shows.

For both groups, this was reallocated to cautious multi-asset allocation funds.

The asset manager reviewed 177 model risk-rated portfolios across 59 firms from July to September 2015.

Natixis Global Asset Management head of the portfolio research and consulting group James Beaumont says it is not a surprise that investors feel “unsure” about fixed income at the moment.

He says: “The continuing uncertainty emanating from various central banks around rate rises has led many advisers to move the money elsewhere.”

“Cautious funds are still heavily weighted towards bonds, so the reallocation could be a case of advisers looking for help from a third party in managing duration risk ahead of any rate rises.”

The study also found that advisers are reluctant to use alternatives in their portfolios, but where they are used they are holding these assets in Conservative and Moderate portfolios.

Conservative and Moderate portfolios had 25 per cent and 16 per cent of average allocations respectively, but alternatives made up just 6 per cent in Aggressive portfolios.

Natixis head of research Matthew Riley says adding alternatives to the portfolio for a diversification purpose makes “a lot of sense”.

However, he says advisers should investigate alternative funds carefully as often “those easiest to understand offer the least benefits”.

He says: “Most are choosing multi-alternative funds as their main non-property alternative vehicles when they are in fact the most correlated of all alternative fund types to the wider portfolio. Some do offer excellent diversification, however, so careful research and selection is key.”