The past three years have not been straightforward for investing. Less than 20 per cent of wealth managers’ portfolios have added positive alpha, according to figures from Asset Risk Consultants, against 50 per cent that generated negative alpha in the three years to the end of 2014.

This was not down to any risk aversion: portfolios have been steadily squeezed up the risk spectrum, according to ARC, with cautious portfolios containing some of the highest equity allocations that the research firm has seen.

The unusual climate has resulted from years of quantitative easing, in which the world’s central banks have collectively injected billions into markets across the globe. The FTSE All World, for example, has been on a rising trajectory since late 2011, gaining almost 60 per cent. The volatility of equities has fallen, while that of bonds has risen, even as bond yields became tightly compressed.

“Mixed asset portfolios are converging in terms of risk, and differentiation of investment styles from a pure volatility point of view is becoming extremely hard,” says Graham Harrison, group managing director at ARC.

“Skill hasn’t really been to the fore since the financial crisis took place and the liquidity taps were turned on.”

End investors have made returns, but they could also have made those in simple portfolios of tracker funds. Is that set to change? “I’m very much a believer that the past is not a prologue to the future. We think markets are going to become much more investment specific, regional and sector specific,” says Tom Becket, chief investment officer at PSigma Investment Management.

“This is a situation where active managers and managers who take a specific approach to investment should start to shine.”

Until that shift occurs, portfolio construction presents particular challenges, especially at the cautious end. “The only real cautious portfolio these days is cash — or a portfolio that is very highly diversified,” argues Mr Becket.

Among balanced portfolios, Canaccord Genuity Wealth Management has the largest allocation to UK and international shares, according to this year’s Financial Times wealth management survey, with 69 per cent in the asset class. This compares with an average of 49 per cent and a low of 20 per cent, held by GHC Capital Markets.

“There’s nothing on the horizon to indicate to us that the equity bull market is over, although we may have another summer dip as we have had several times in the past,” says Canaccord’s chief investment officer, Nigel Cuming.

PSigma, by contrast, rejects the increased equity allocations adopted by some rivals, instead seeking yield through quality fixed income and specialist credit, while protecting against inflation through index-linked bonds and commodity holdings.

Across the board, corporate bond allocations have fallen: among wealth managers surveyed, the mean allocation in balanced portfolios has fallen to 17 per cent from 19 per cent a year ago. In growth portfolios, it is down slightly from 11 per cent to 10 per cent.

Charles Stanley, Rothschild and Ruffer are all among the firms with zero holdings of corporate bonds in their balanced portfolios, as the asset class is challenged by low yields, liquidity worries and volatility.

James Maltin, chief investment officer at Rathbones, says: “We have reduced our position in conventional bonds with a preference for short-dated index-linked government bonds . . . Coupled with an improving labour market and increasing pressure on wages, we consider inflation-linked bonds to be an attractive alternative to cash, especially for higher-rate taxpayers.”

Meanwhile, some 30 per cent of wealth managers surveyed have no allocation to government bonds at all in their balanced portfolios. This is hardly surprising in a world of such low yields that creditors will even pay governments to borrow; in April, large chunks of short-term northern European government debt traded at unprecedented negative yields, although that trend has since gone into reverse.

One firm taking a different approach is Investec Wealth, which holds 28.5 per cent in government bonds thanks to a “bar-belling” approach which aims to exploit negative correlations between bonds and equities.

This served the company especially well in 2008, 2011 and more recently last year, when UK bond markets far outperformed equities, says Darren Ruane, head of fixed interest at Investec.

“However, we may begin to see some of these asset classes become positively correlated, particularly as interest rates start to rise,” he adds. In preparation for this, the company has begun switching some assets from equities into cash. In its corporate bond holdings, Investec is limiting maturity and credit risk, and holding many bonds to maturity, avoiding the effects of any sell-off.

So-called “alternative” asset classes have benefited from the hunt for yield. Allocations to hedge funds are up slightly on last year, as are private equity holdings.

Rathbones has increased its positions in asset classes beyond equities and bonds. But having been exposed to both property and infrastructure in recent years, “yield compression in prime property investments is a cause for concern, as are the premiums to net asset value at which the share prices of infrastructure funds trade”, Mr Maltin says.

Income seekers have also looked to newer asset classes, such as peer-to-peer debt, now accessible through a series of investment trusts. Killik has invested in P2P Global, the first such trust to come to the market, although Mick Gilligan, head of fund research, cautions: “It is very early days in this area, and it will take time and probably a recession to provide a proper stress test.”

In the meantime, many wealth managers believe a new investment environment is approaching, potentially to be sparked by the long-awaited rise in US interest rates. Mr Harrison is confident this will present new opportunities for alpha generation.

“We are coming up to some sort of crunch point, though we don’t know what form that will take,” he says.

“In the future, we’re not going to get a situation where equities are less volatile than bonds for any period of time, and we’re not going to get a situation where skilful managers selecting the best companies to invest in are not adding any value.”

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