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September 2016 Update - Review to June 2016

Willis Towers Watson Quarterly Review

The latest Willis Towers Watson review of the economic assumptions underlying the optimised portfolios available through our platform has resulted in revised asset allocations this quarter.

The review showed a fall in the projected long-term returns for all the major asset classes considered, whilst long-term volatility was broadly unchanged. There was a considerable change in the relative risk/return across the various asset classes, leading to material changes in the asset allocations within the optimised portfolios, reducing fixed interest and property in favour of cash and international equity. 

Platform asset allocations

The effect of the review’s results has meant material changes in allocations between the asset classes, and minor changes between different product wrappers reflecting the tax effects on projected returns. The most notable shifts have been a full move out of fixed interest to cash, reflecting the assessment that for the defensive proportion of the portfolios, UK fixed interest is currently forecast to be expensive on a relative basis to cash. The allocations to property have also reduced materially this quarter, reflecting a poorer expected risk/return profile for this asset class post-Brexit, whilst the allocation to international equity has increased relative to UK equity.

Review results

During the quarter the largest reduction in the forecast returns was from UK gilts (decreasing from 1.09% to 0.40% p.a.), corporate bonds (reducing from 2.36% to 1.69% p.a.), and property. The expected returns for UK gilts and corporate bonds are influenced by current long bond yields, and these reduced significantly during the quarter.

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 1.48% p.a. from 1.87% p.a. reflecting a slower expected pace for UK interest rate rises. Projections for UK equity returns also decreased from 6.97% to 6.56% p.a., whilst international equity return expectations decreased from 7.60% to 7.45% p.a. and projected returns for commercial property decreased from 4.07% to 3.50% p.a., driven by the reduction in expected cash returns, and the potential impact of Brexit on demand for property.

View the standard asset allocations as at 22 September 2016

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