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September 2015 Update - Review to June 2015

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

All major markets and asset classes enjoyed positive returns for the first quarter of 2015, with the exception of commodities which continued to suffer from a weakening oil price and soft metal pricing. There were a number of stimuluses’ across markets including Japan and European Quantitative Easing plans stimulating both equity and fixed interest markets. Low inflation figures, fuelled by falling energy costs, postponed expectations of rate rises and fed through into improving economic activity in areas such as the euro zone.  Fixed interest markets have proved very volatile, rising in value on low inflation data and central bank action to stimulate economies by buying in debt, but falling back when investor focus turns to the low historic yields, or data suggesting inflation may pick up later in the year.
Given the above positive gains in all major markets in early 2015, the Towers Watson forecast expectations for future returns have in general decreased over the quarter, with risk measurement (volatility) either static or marginally declining. 
The outcome from the model, has been at many risk levels, no change in asset allocation or very minor alterations, with the exception of cash and Fixed interest assets.  As stated last quarter over the last year there has been a steady reduction in fixed interest yields and to a lesser extent, a reduction in long-term projected cash yields. This has led to a gradual, but sustained movement away from UK fixed interest holdings in favour of increased cash holdings across the majority of the risk profiles.
With the continued fluctuations in fixed interest markets and considering the cost to clients of switching the most appropriate action is to maintain the current fixed interest allocations. Therefore the overall asset allocations this quarter remains unchanged.
  • Cash and UK fixed interest – Whilst the cash assumptions remained steady, the Towers Watson return assumption for UK fixed interest has risen. This is the result of Towers Watson’s 10 year return assumptions increasing for both UK gilts and UK corporate bonds; with the latter also experiencing an expansion of credit spreads as investors demand a higher return to hold corporate bonds relative to Government bonds. The result of the increased expected returns from UK fixed Interest has seen a considerable reallocation into UK fixed interest assets mostly from cash holdings.
  • Equities– The second quarter projections produced minor change in both the forecast returns and volatilities for both UK equity and International equity. These minor changes have resulted in small alterations to equity allocations across the ranges.
  • Property– The projected returns remained fairly consistent this quarter, but in the light of increasing estimated returns from other asset classes, the impact is that property allocations have been adjusted down in ISA, CRA and Offshore Bond for risk levels 6 and 7 and holdings removed at risk levels 8 and 9; in favour of increased fixed interest exposure along with small additions to UK equity.  
  • International equity split–The individual country allocation of equities is reviewed annually in line with a GDP weighting. The table below demonstrates the new split. The most prominent changes are the increase in USA and Far East market exposure and a reduction in Europe, reflecting stronger economic growth in US and Far East economies relative to Europe.

View the current platform allocations.

International Equity Split

New

Old

North America

24%

22%

European

19%

22%

Japanese

6%

7%

Far East Ex Japan

24%

22%

Emerging Markets

12%

12%

Global Specialist

15%

15%

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