The demise of Gars, combined with rising bond yields, has called into question the fundamental and sentimental reasons for owning alternative funds.
Therefore, we thought it was about time we plundered Asset Allocator's proprietary databases to check out the levels of exposure to alternative assets among the discretionary fund managers we monitor.
Our database shows the average allocation to alternatives in the Balanced portfolios is 7 per cent, a marked drop on the 9 per cent which was the average in September 2022.
This timeframe appears to coincide with the start of the central bank rate raising cycle.
The house with the biggest exposure to alternatives is Quilter Wealth Select, at 25 per cent, a figure which bucks the trend in another way, as it is an exposure which has risen steadily over the past year.
Honourable mention here also goes to Bordier UK, at 21 per cent, which is three times the peer group average.
Bordier UK's representative has told us the reason is Bordier has a long-standing alternatives bucket in its portfolios, with a focus on capital preservation and diversification away from both bonds and equities.
The portfolio has the standard issue 60 per cent in equities but is sharply underweight in bonds, indicating that’s the asset class to which the team is seeking an alternative right now.
At the other end of the distribution, the DFM with the lowest allocation to alternatives is a trio of established names: Morningstar, AJ Bell and Tacit are all allocating zero to the asset class.
Now we know that 'alternatives' is a term that can cover a multitude of investments, so we have grouped the funds in the universe into three categories, as shown in the table below, as Hedge Funds, Absolute Return, and Other.
| July 2023 | |||
| Absolute return | Hedge fund | Other | |
| 7IM | 10 | 5 | 0 |
| AJ Bell | 0 | 0 | 0 |
| You | 7.6 | 8.7 | 0 |
| Iboss | 4 | 0 | 0 |
| Brooks | 3.96 | 8.01 | 0 |
| LGIM | 3 | 0 | 0 |
| Brewin | 1.51 | 0 | 0.91 |
| City AM | 3.5 | 0 | 0 |
| Gam | 3.94 | 5.08 | 0 |
| Hawksmoor | 0 | 4 | 0 |
| Liontrust | 0 | 0 | 0 |
| Quilter Cirilium | 0 | 3.71 | 0 |
| Quilter Wealthselect | 15.1 | 0 | 2.41 |
| Evelyn Active | 0 | 3.74 | 0 |
| Abrdn | 2.69 | 0 | 0 |
| Invesco | 1 | 0 | 0 |
| Progeny | 0 | 0 | 0 |
| M&G Wealth | 3.5 | 0 | 0 |
| Tacit | 0 | 0 | 0 |
| Waverton | 4.4 | 0 | 1.4 |
| Albert E Sharp | 12 | 0 | 0 |
| Wise | 5.9 | 0 | 7.9 |
| Pacific AM | 4.67 | 4.46 | 1.6 |
| Handelsbanken | 0 | 6.4 | 0 |
| Average | 3.62 | 2.04 | 0.59 |
As the table shows, the bulk of any alternatives exposure out there is in Absolute Return funds, despite the travails of GARS, the product that largely created the term absolute return for a mass market audience.
Though one can see from the data why the gruel has been so thin for absolute return managers in recent years, that average exposure of 3 per cent probably means just one such fund per portfolio.
The table suggests that Quilter's Wealth Select’s aforementioned chunky alternatives exposure is largely in Absolute Return strategies, at 15 of the 24 per cent.
Our proprietary database shows the most widely owned Absolute Return fund among the allocators we cover is Neuberger Berman’s Uncorrelated Strategies fund, which appears in eight of the portfolios we monitor.
Now perhaps those hedge fund folk do not need to resort to gruel, unless it's gold-encrusted, and the team at You Asset Management have been helping to keep the Lamborghini dealers of Britain in trophy wives (or husbands), with their chunky 8.7 per cent allocation to the hedge fund sector.
But with other asset classes beginning to price in a peak in interest rates, and therefore bond yields, it may be that the reality for alternatives looks very different in a year or so.
david.thorpe@ft.com
