The latest Willis Towers Watson (WTW) review of the economic assumptions underlying the optimised portfolios available through our platform has resulted in a revision to asset allocations this quarter.
Over the quarter there was a reduction in the expected returns on all asset classes considered, with the exception of international equity. Long-term volatility was broadly unchanged across all asset classes.
The largest reduction in forecast returns was within UK fixed interest, specifically UK gilts and UK corporate bonds. The long-term expected returns for UK gilts decreased to 0.25% from 0.40% p.a., and the projected returns for UK corporate bonds decreased to 1.26% from 1.69% p.a. The expected returns for these asset classes are influenced by current long bond yields, which reduced during the quarter. The return on UK corporate bonds was also impacted by a reduction in credit spreads due in part to QE, which now specifically targets corporates as well as gilts.
The projected cash return forecasts have a tendency to influence projected returns on other assets such as equities and property. Over the quarter the expected long-term returns for UK cash reduced to 1.23% p.a. from 1.48% p.a. reflecting a slower expected pace of UK interest rate increases. The projected expected returns for UK equity decreased to 6.29% p.a. from 6.56% p.a., whilst projected returns from international equity increased to 7.62% p.a. from 7.45% p.a. reflecting a small increase in expected US cash returns.
The projected expected returns for UK commercial property reduced slightly to 3.46% from 3.50% reflecting the reduction in forecast UK cash returns, but also taking account of the higher yields available on this asset class after recent property price falls following the Brexit decision.
The effect has been changes in the allocations between the asset classes, with some variations between different product wrappers reflecting the tax effects on projected returns. The most notable shifts are an increase in the allocation to international equity relative to UK equity, and for some tax wrappers a reduction in the allocation to property and an increase within defensive assets to cash.
View the standard asset allocations as at 16 December 2016