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Adviser Fund Index

Fixed-interest weighting in the Adviser Fund Index portfolios have remained buoyant over recent years despite uncertainty surrounding the asset class.

Since the May 2007 rebalancing, the overall weighting to fixed interest has increased across all three of the benchmark indices. The changes saw allocations rise six percentage points in both the balanced and cautious portfolios, while it rose one percentage point in the higher-risk aggressive portfolio.

Some panellists have expressed their confusion at the findings, however.

Whitechurch Securities head of research Ben Willis says: “We have actually trimmed our exposure to fixed interest. We have upgraded our view to neutral from negative on the view that with interest rates at this level our fixed-interest holdings should be supported, but we are not adding to our positions.”

Other panellist share Willis’ sentiments. AFH Independent Financial Services head of investment research Graham Toone says at present there appears to be limited value across the risk spectrum.

He says: “We have not had gilts in our portfolios for some time and we are not overly keen on sovereign debt in America or Europe. Our call in fixed interest was in high-yield. We are still hanging in there but it is fair to say that we are not as convinced of the case as we were a few months ago.”

What is interesting to note, however, is that across all three portfolios, the fixed- interest weightings peaked in 2009 and began falling away in 2010. This might suggest that panellists were taking some profits from the earlier rally until recent market uncertainty.

These conditions have traditionally led investors into perceived safe assets, including American treasuries, gilts and gold. It is no surprise that precious metal prices have reached historical dollar highs in recent weeks as the poor news flow continues. Yet the combination of a slowdown in emerging stockmarkets and the return of sovereign debt concerns in the peripheral eurozone economies have helped to dampen enthusiasm over prospects of a smooth recovery.

While a sizeable shift into developed market sovereign debt may seem bold in the circumstances, it is certainly not implausible.

Willis says: “I still think people are looking at sovereign debt as a safe haven but it is a short-term trade. As soon as the outlook improves, it would not be surprising to see these positions start to reduce.”

Another potential explanation is the rise of strategic bond funds in the portfolios. The advent of funds that are able to move across the risk and duration spectrums of the bond market has reduced the need for investors to switch in and out of these products in the face of challenging short-term market conditions.

Such has been the popularity of funds that successful managers have seen assets under management swell at great pace. The Legal & General dynamic bond trust, managed by Richard Hodges, has grown by over £1bn since February last year.

The surge in flows into the sector has caused some panellists to question whether they will be able to deal with large-scale redemptions if sentiment turns.

Toone suggests the rise of another sector could ultimately lead to a structural reduction in overall fixed-interest weightings within the AFI portfolios. He says: “We have started using lower-risk absolute return funds in place of some of our fixed-interest products. At present, we feel it is probably prudent to err on the side of caution.”


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