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March 2016 Update - Review to December 2015

Asset allocation quarterly review

The latest Towers Watson review of the economic assumptions underlying the optimised portfolios available through our platform has resulted in a revision to 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.

Towers Watson’s  long term projected returns across all of the asset classes considered have risen slightly for the end of the fourth Quarter 2015. These increases in projected returns have led to very small overall changes in the asset allocations within the multi-asset optimised portfolios, across risk levels and investment products.

Alterations in projected UK cash returns have a tendency to influence projected returns on other assets such as equities and property. Expected cash returns have risen to 1.86% from 1.67% as UK interest rates are now expected to start to rise in coming years. Correspondingly projections for UK equity and commercial property have both increased by 0.2%, resulting in expected returns of 7.37% and 4.63% respectively. While, international Equity return expectations have increased by a smaller amount (0.13%) to 7.79%.

UK Government Bond (Gilts) expectations are influenced by current long bond yields, which increased towards the end of 2015. This has resulted in long term expected returns for UK Gilts increasing by 0.23% to 2.09% and alongside this a smaller increase in projected returns for corporate bonds by 0.17% to 3.3% has also been calculated.

The overall effect has been very small changes in allocations between the asset classes and minor changes between different product wrappers reflecting tax effects on projected returns. The most notable shift has occurred for  risk levels 5 to 9, with a reduction in  international equities, mostly in favour of UK equities, of between 1% and 4%. 

View the current platform allocations.

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