Asset Allocator made the short hop through the City of London recently to catch up with Lothar Mentel, chief investment officer at £12.6bn model portfolio provider Tatton.

Mentel mentioned that his company's income models remain a small part of the overall book, as the 900 advice firms they work prefer to have portfolios run on a total return basis and encash units to pay out income where required. 

Turning to how he is allocating right now, Mentel says he is neutral across all asset classes - but that reflects a significant shift in his exposure towards fixed income in recent years. 

He feels “bonds are back” and he had little exposure to bonds until recently as he felt yields were too low.

Mentel now sees bonds as a provider of returns but more as an income-bearing asset class than an opportunity for capital gains. 

He believes duration will be less a driver of returns from fixed income in the years ahead, and indeed acted on that notion at the end of last year.

Having previously been stoutly long duration, he moved back to a neutral position between Christmas and new year. 

He is sceptical of the outlook for high yield bonds, noting that they performed well in 2023 but he feels the yields currently on offer are not sufficiently attractive to justify owning those assets.

Mentel views high yield bonds as having a similar level of volatility as equities right now, and would rather own the equities at these valuation levels than the bonds. 

Our Asset Allocator database indicates the average allocation has remained relatively constant at 2.5 per cent over the past six months or so, albeit that number is heavily skewed by one firm, Tacit having a 15 per cent allocation there, while a number of the larger houses, such as Rathbones and Parmenion have zero allocated there, while Quilter have a meagre 1.2 per cent, and the Evelyn Partners portfolios have 1.5 per cent.