Willis Towers Watson Quarterly Review
Following the latest Willis Towers Watson review of the economic assumptions underlying the optimised portfolios available through our platform, there will be no asset allocation changes this quarter.
This review ran to the end of Q1 2016.
Platform asset allocations
Markets were volatile over Q1 2016 as investors reacted to changing guidance from central banks and inconsistent economic data. Following heavy sell offs in January to mid-February, most markets recovered considerably towards the end of February and throughout March. The main factors driving markets were views over the Chinese (and global) economy, central bank policy, oil price swings along with considerable currency volatility, notably the weakness in Sterling (a result of the Referendum) and Yen strength.
By the end of the quarter initial fears over the pace of rate increases from the Fed moderated, and Japan and Europe acted to boost activity, with Japan cutting rates and the ECB proposing further stimulus packages. Additionally the markets took the view that China’s growth rate and global economic growth rates, whilst expected to trend down through 2016, were not expected to completely halt; whilst fears over deflation were partially waylaid by the recent recovery in commodity prices. Over the first quarter of 2016, government bonds and other corporate assets rose on the growing belief that interest rate increases and inflation will continue to remain subdued, with no likely return to average levels for either in the foreseeable future. World equities also rose during the quarter, with strong gains from emerging markets and the US offsetting weaker performance from the UK, Japan and China markets. Within alternatives, UK property fell over the quarter while commodities experienced positive returns.
Impact on assumptions
The impact on Willis Towers Watson’s long-term projected returns was that for all the major asset classes considered, projected long-term returns fell, whilst long-term volatility was broadly unchanged.
The projected UK cash return forecast has a tendency to influence projected returns on other assets such as equities and property. Over the quarter the expected long-term returns for cash reduced to 1.87% p.a. from 2.26% p.a. reflecting a slower pace of expected UK interest rate rises. Projections for UK equity returns also decreased to 6.97%p.a. from 7.37% p.a., as did projected returns for commercial property which decreased to 4.67% from 5.23% p.a. International equity return expectations also decreased to 7.60% from 7.79% p.a.
During the quarter the largest reduction in forecast returns was from UK gilts, with corporate bonds also reducing. The expected returns for these asset classes are influenced by current long bond yields, and these reduced significantly during the quarter. Long-term expected returns for UK gilts decreased to 1.09% from 2.09%p.a.; whilst the projected returns for UK corporate bonds reduced to 2.36% from 3.30% p.a.
Against the backdrop of continuing fluctuations in fixed interest projected risk and return, and a desire to maintain diversification within the portfolios, , it was decided that the most appropriate action is to maintain the current asset class weights within the portfolios. Therefore the overall asset allocations this quarter remain unchanged.
View the standard asset allocations as at 20 June 2016