New analysis from Asset Risk Consultants (ARC) shows that performance across all risk profiles bounced back in January but also reveals that the proportion of private client portfolios in the lower-risk cautious and balanced categories has fallen to a record low.
Key points:
- most common portfolio strategy up 3.5% in January 2023 having fallen 10.2%* in 2022
- proportion of portfolios in the cautious category now makes up less than 1% of all portfolios
- 12-month positive change in sentiment towards the bond sector up to 53% from 2%
- multi-asset cautious and balanced portfolios could return amid changing outlook for bonds
The average return of the ARC Sterling Steady Growth Index (based on the most common risk profile run by discretionary investment managers) recorded average losses of-10.2 per cent in 2022, below the historical average return of 5.9 per cent per annum and the second-worst year since the inception of the ARC indices in 2004. Caution was unrewarded as the perfect storm of rising inflation and the normalisation of bond yields blew away the value of bonds. The lower risk categories, balanced and cautious, failed to offer capital protection and fell 9.1 per cent and 7.6 per cent respectively.
The ARC universe has reflected that shift in portfolio construction with the percentage of sterling private client portfolios falling into cautious and balanced asset categories declining. The proportion of portfolios in the cautious category fell from around 10 per cent at the end of 2010 to below 1 per cent at the end of 2022. Taking the two lowest risk categories together, the percentage has fallen from around 40 per cent of portfolios to around 15 per cent**.
Since the financial crisis, bonds have delivered negative real returns. ARC says that as a result, private client discretionary managers sought to minimise exposure to fixed income as the suitability of conventional multi-asset class portfolios was called into question.
However, ARC says that there is evidence that the financial repression of bonds delivering negative real returns may be ending and, with equity market valuations returning towards historical norms investors can potentially expect to achieve positive real returns once the current inflation pulse subsides.
Graham Harrison, chairman at ARC, says: “Looking to 2023 and beyond, it seems likely that investors will face ongoing uncertainty. However, uncertainty also creates opportunities for discretionary managers and, with equity valuations becoming more attractive and real bond yields improving, there is hope that 2023 will be a better year for investors.
“It also seems likely that portfolios exhibiting a risk profile of the cautious or balanced Asset categories will see something of a renaissance as bonds begin to offer the prospect of positive real returns. For a decade or more it has made sense for investors to throw caution to the winds with only equities appearing to offer a positive real return. That has changed and once again it has begun to make sense to consider bonds as a viable investment class.”
ARC collects the actual performance of more than 350,000 investment portfolios from more than 140 investment managers and a steady growth portfolio typically has around two-thirds of exposure to equities with the remainder in other asset classes such as bonds.
* based on ARC Private Client Indices GBP Steady Growth portfolios, the most commonly held portfolio type by private clients
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