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September 2014 Update - Review to June 2014

Asset allocation quarterly review

The latest Towers Watson review of the economic assumptions underlying our platform optimised portfolios sees revised asset allocations this quarter.

Platform asset allocations

This review includes a number of changes to the economic assumptions and a revision of the international equity split used within the platform model following an annual review.  The highlights of the changes to the economic assumptions and asset allocations over the quarter are as follows:

Cash and UK fixed interest – Whilst the cash assumptions remained steady this quarter, the Towers Watson (TW) return assumption for UK fixed interest (relative to CPI) fell c0.1%.  Whilst there was a slight increase in TW’s 10 year return assumptions for UK gilts, this was more than offset by a reduction in the expected returns for corporate bonds, which was driven by the continued narrowing of credit spreads over the quarter. Consequently this quarter, there is a further change in the asset allocations in favour of cash over fixed interest up to risk level 7.

Cash within ISA – This quarter sees the integration of cash within optimised ISA portfolios including risk levels 1 and 2.  This is in line with changes in the ISA regulations that came into force earlier this year.

Equities – This quarter sees a drop in the return assumption for international equity and a slight decrease in its volatility assumption. Whilst there has been relatively little change in equity market levels over the quarter, changes in TW’s cash return assumptions give rise to a small reduction in returns from US equities.  The equity return assumption is built up from TW’s cash assumption with an allowance for the assumed equity risk premium. In contrast, UK equity assumptions remain essentially unchanged. Consequently, the asset allocation model apportions slightly more to UK equity at the expense of international for the higher risk levels.

International equity split – In March 2013 we changed the split applied to the international equity asset class for the platform allocations from one based on a combination of market cap and GDP to one based solely on GDP (the MSCI ACWI GDP Weighted index). The GDP index is reset each May. Following this reset, Skandia captures any changes within TW’s review to 30 June 2014, the outcome of which changes are applied this quarter. This split doesn’t impact the actual amounts allocated to international equity, only the subsequent split of international equity post-optimization. The table below demonstrates the changes resulting from the reset. The most prominent change is the increase in emerging markets equity, the scale of which is a combination of index weighting and rounding.


International Equity Split   New     Old 
North America 22% 25%
European 22% 25%
Japanese 7% 10%
Far East Ex Japan 22% 20%
Emerging Markets 12% 5%
Global Specialist 15% 15%


View the current platform allocations and economic assumptions underpinning them (as at 18 September 2014).

Asset allocation updates for the Old Mutual Spectrum Funds and WealthSelect Managed Portfolio Service are being made at 30 September and 1 October respectively and we will communicate the changes to you at that time.

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