Asset Allocator recently covered how wealth managers struggle to pick winners in Japan. 

This time around, on a more optimistic note, DFMs are nailing it in the fixed income sphere. 

Our database shows relative success among managers when picking active fixed income funds, with strong performance the norm.  

33 per cent of DFMs’ corporate bond picks are delivering top-quartile returns across a three-year period, as are 50 per cent of their government bond funds.

Remarkably, 86 per cent of all chosen high-yield bond funds are also performing in the top-quartile.

This may be because high yield bond funds are typically short duration in nature, and as we have previously discussed, being on the wrong side of a few duration calls has been the biggest differentiator in performance terms in recent years. 

Despite being the most economically sensitive part of fixed income markets, demand among the allocators we cover for high yield funds has been quite robust, with a drop of just 20 basis points over the past twelve months.

Speaking of duration, Olivia Geldenhuys, who works on the model portfolio range at Schroders, has been in touch to say that in the portfolios she works on, they have been steadily increasing duration over the past year, to the point where they are at about the benchmark of seven years right now.

At the other end of the spectrum, only 11 per cent of DFMs’ corporate bond funds are languishing in the gutter, alongside 14 per cent of their high-yield offerings. 

No government bond funds have underperformed the peer group across the three year time horizon.

Geldenhuys says one major strategic change made at Schroders has been to dispense with holdings in dedicated gilt funds in favour of owning a global government bond fund. 

Of course the latter contains gilts among its assets, but Geldenhuys says the decision is motivated not by a particular dislike of UK government debt, but instead by a view that given their enhanced volatility, they no longer deserve to be a strategic allocation within portfolios. 

Over at Premier Miton, David Hambidge has been preparing portfolios for the peak in rates, taking profits on the floating rate note exposure in portfolios, and clipping the coupon on the bonds in the portfolios, rather than chasing capital gain as rates fall. 

This is because he expects the market will need to see more proof of central bank intentions around the direction of monetary policy before the bond market can properly be plundered for capital gain.