The Fed’s Jackson Hole symposium was the biggest indicator that we may, finally, see some of those mythical rate cuts we were promised all those months ago.

The eternal optimists among us may still be angling for two or three but – regardless of the extent – it’s clear the tide is turning.

That begs the question: how are DFMs preparing to play it? 

Well, a number of frenzied changes have taken place across portfolios to reflect the news, and Asset Allocator has picked them out one by one.

Beginning with the pessimists, Omnis have recently established positions in long-dated Treasuries and global inflation-linked bonds across their Omnis Agility range.

This is because they believe recent economic data from the US highlights the increasing risks of a global economic recession. 

“To reflect this macroeconomic outlook, we have established positions within long dated US Treasuries and global inflation linked bonds,” they said. 

“This environment should be favourable for long-maturity US government bonds as investors flock to safe haven assets amongst economic weakness. We also believe that inflation-linked bonds can potentially outperform their traditional government bond counterpart.” 

In practice this reduced corporate and global bond exposure was reallocated into the iShares US Treasury Bond 20yr+ ETF and the iShares Global Inflation Linked Government Bond ETF. 

Omnis are not the only ones adding to their longer-dated exposure. Portfoliometrix told us they’ve done the same to balance off the risks from corporate bonds.

“We think we are now at the end of the rate hiking cycle, and the probabilities are definitely now to be cutting rather than increasing, and therefore locking in some of those high yields over longer periods makes sense,” said Alex Funk. 

“And we acknowledge that spreads are tight right across corporates and high yields, and so we're capturing some of those profits in the portfolio.”

As Asset Allocator reported recently, Momentum ditched its UK inflation-linked gilt position and trimmed exposure to other inflation-linked bonds to make way for their nominal equivalents. 

It seems like inflation protection comes at too much of a premium for some.

“Although inflation-linked bonds present appealing real yields, they are just not particularly cheap today,” said Gregoire Sharma, senior research analyst at Momentum. 

But if a hard landing is avoided and everything finally comes up Millhouse then this may benefit small-cap stocks, which allocators have been stockpiling throughout 2024 (that is, before they got trounced during the market’s August wobble). 

Small-caps are becoming a key valuation play for DFMs this year, as many allocators have reinvested their proceeds further down the market cap ladder in the hope to catch the potential post rate cut recovery. Indeed the proportion of US equity holdings in our database invested in small cap funds has increased to just over 11 per cent since the start of this year.

For others, this opportunity could just mean thinking beyond the S&P 500 in terms of passive instruments and getting exposure to the whole of the US market instead, through vehicles such as the Vanguard US Index. 

Indeed Portfoliometrix said they prefer not to limit themselves to 500 businesses, allowing them to scoop up as much as possible from the US.