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June 2016 Update - Review to March 2016

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

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.

Market review

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

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