Slightly later than usual, due to the new ISA regulations coming into force, here is the latest Towers Watson review of the economic assumptions underlying the Skandia optimised portfolios, WealthSelect Managed Portfolio Service and Old Mutual Spectrum Funds, which results in revised asset allocations for all but Spectrum this quarter.
Platform asset allocations
The highlights of this quarter’s review are as follows:
Cash and UK fixed interest – This quarter sees no change in the assumptions for sterling cash, but a slight reduction for UK fixed interest. This is because Towers Watson’s assumption on 10 year returns for UK fixed interest (relative to CPI) has decreased by c0.2% a year despite a widening in credit spreads over the quarter. Due to the decline in UK government bond yields over the quarter, the overall expected return for fixed interest has reduced, which sees the model move away from UK fixed interest in favour of cash. This is most pronounced in risk levels 4 to 6.
Equities – Towers Watson advises there has been little change in equity market levels over the quarter leaving the equity assumptions broadly unchanged. However, a reduction of c0.2% a year in the Euro cash returns creates a slight fall in the return assumption for international equity when accounted for alongside the global equity risk premium. As a consequence of the changes to the wider assumptions, the model allocates slightly more to UK equity across the risk scale and slightly less to international equity at the higher risk levels.
UK property yields continued their gradual decline and consequently the UK property return assumption has been reduced by c0.2% a year. This has relatively little impact on the asset allocations because of the 15% property cap already in place.
WealthSelect Managed Portfolio Service
The first quarterly asset allocation review for the WealthSelect Managed Portfolios has seen a shift towards emerging markets equities, with a particular emphasis on Asia and specifically China as economic indicators point towards market growth in the region. China has started to recover from a prolonged period of underperformance relative to other emerging markets which in turn have underperformed developed markets. In contrast exposure to US and European equities has dropped slightly to reflect the view of the relative valuation differential between developed and emerging markets.
View the WealthSelect Managed Portfolio asset allocations (as at 1July 2014)
Old Mutual Spectrum Funds
The latest Towers Watson report has shown decreased expected future returns for global government bond markets given the rally over the first quarter. While there is a gradual normalisation in bond markets, the funds remain underweight duration risk as the likelihood of higher yields has increased. Elsewhere, equity weights have increased in the UK from international equities. Given that this is more of a marginal change due to the sensitivity of optimisation, and that the funds tactical positioning reflects the bond view, no changes have been made to the allocations. As always, the tactical asset allocation views are designed to maximise performance while meeting the risk targets of each of the funds.
Old Mutual Spectrum Funds current asset allocations (as at 30 June 2014) will be made available shortly.