Wealth managers batten down the hatches as the US enters a technical recession

As wealth managers now look ahead to the rest of the year, many of the risks they faced are still evident.

Inflation remains at multi-decade highs, central banks are raising rates and markets around the world are still nervously anticipating recessions. The United States has now technically tipped into recessionary territory, following a surprise contraction in GDP of 0.9% in the second quarter, according to Commerce Department figures.

Wealth managers will obviously take a longer-term view than the rest of 2022, but many are already modifying their clients’ portfolios in anticipation of the next six months.

An emerging theme observed in the portfolios of wealth managers is a lower appetite for risk. Given the looming macroeconomic challenges, many investment managers are actively shifting from risky assets, such as equities, to safe havens. This is the case of Brewin Dolphin where the equity positions went from overweight to neutral.

“This is due to a tougher economic environment and tighter monetary policy,” says Janet Mui (pictured), the company’s head of market analysis. “We have positioned our portfolios more defensively and towards greater exposure to quality.”

Government bonds are no longer uninvestable

Evelyn Partners is another company that is becoming more defensive, and multi-asset fund manager Ben Seager-Scott took advantage of the market selloff and reintroduced government bonds for their defensive qualities.

“The sell-off in government bonds means that this asset class has come in from the cold after many years of being essentially uninvestable for us, so we have started to dive back into conventional duration, while maintaining low exposure. credit life,” says Seager-Scott.

“We are also keeping our position in gold, which can act as a shock absorber. And we continue to favor alternatives over a large exposure to fixed income, especially absolute return funds, which have really proven themselves so far this year, and we’re confident they can continue to do it.

Fixed income securities are viewed similarly across the industry, with positions being established in anticipation of increased volatility. At Charles Stanley, strategist Benedict Tottman said the company takes an underweight view of duration with positions at the short end of the curve.

“We continue to share this view at this time, but are watching for opportunities to expand duration positioning,” Tottman said.

“Spread exposure has become more attractive given the widening seen over the past few months. We have seen an increased level of spread volatility and are watching for a favorable entry point to increase allocations to high yield credit, which we believe may represent soon.

See also: Will Attractive Yields Drive Investors Back to Investment Grade Credit?

Cash and other opportunities

As wealth managers move into defensive territory, cash buffers are being built up at many companies. This has not only reduced equity risk, but also allowed investment managers to seize opportunities as they arise.

Stuart Clark, portfolio manager at Quilter Investors, deploys this tactic for the WealthSelect portfolios he helps oversee: in other asset classes that we considered more attractive.

“Recently, we have reduced equity and at the same time reduced cash to buy government bonds to maintain the expected overall level of risk.”

See also: Ruffer switches to ‘crouch mode’ and reduces equity exposure ahead of ‘dangerous’ H2

The approach differs elsewhere. At Charles Stanley, Tottman ensures he has defensive exposure to cash, ultra-short government bonds, short-term investment-grade credit and infrastructure.

Meanwhile, Evelyn Partner’s Seager-Scott escalates her favorite themes: “We’re not taking money out, but rather making sure we’re rebalanced, completing high-conviction positions that have been caught in blind sales, and make sure we have a balance that includes more defensive areas as well as long-term quality.

“It makes sense to ensure portfolios are exposed to more defensive areas that can weather potential storms, especially areas such as utilities and healthcare, as well as dividend-paying stocks. news is already priced in, and earnings season offers investors an opportunity to refocus on fundamentals.

And then ?

The industry sentiment is clear – risk exposure has been cautiously minimized, with investment managers building defensive walls for bad days. This takes many different forms – cash reserves, alternatives, government bonds, etc. – but, as always, investors have no idea what will happen next.

With inflation continuing to put pressure on central banks and the Russian-Ukrainian conflict not in sight, the consensus expects recessionary conditions to hit markets within months. The global nature of the macro issues facing UK wealth managers has not made asset allocation decisions any easier.

“[Looking for the opportunities] in the second half, geographically speaking, it’s an interesting question because I think we’re in a difficult environment from a global perspective,” admits Clark.

“Perhaps a better way to think is to look at those more defensive sectors with decent yields that can support returns alongside exposure to alternatives, rather than looking at specific regions.”

Seager-Scott agrees and warns that it’s too early to make specific calls about when the next big correction will happen and where it might hit them.

“It’s hard to make a strong geographic appeal, we tend to think more in terms of sectors and styles at the moment,” says Seager-Scott.

“For the second half of the year, we are looking to ensure that we have a good balance in equity allocations across geographies, styles and sectors. We continue to believe that a long-term trend of favoring high-quality companies with sustainable growth characteristics is a sensible approach to helping our investors achieve their end goals.

Dolores W. Simon