Asset Allocation

Academic studies highlight the importance of asset allocation with many suggesting the type and proportions of assets held in a portfolio are responsible for a significant proportion of its long-term performance.

But what is a suitable asset split? Different asset classes behave in different ways – a fact that means the manner in which you combine them can significantly affect not just the performance potential of a portfolio but also the way it behaves.

Detailed analysis of past performance and its characteristics can really help in facilitating the creation of a portfolio mix likely to behave within reasonably well defined parameters – and one that gets reasonably close to the ideal balance between performance and risk. It’s this process of analysis, modelling and subsequent asset split recommendation that underpins the concept of risk-targeted funds like the Lifestyle range.

Model portfolios

Volatility bands and asset allocation models are reviewed quarterly. If appropriate the asset mix of the Lifestyle Fund is changed to ensure it continues to meet its objective.

The benefits are obvious. For advisers they provide consistent propositions that can easily be aligned with defined client types; and assuming no change in client attitude to risk remain suitable at the outset and for the duration of an investment. This alignment is obviously beneficial for the client too as the asset mix they hold is one that is suitable for their needs – a peace of mind investment that shouldn’t throw up any nasty surprises. Distribution Technology reviews the asset allocations for each risk profile quarterly. The asset allocation table below is as at 1st September 2019.

Lifestyle Foundation - Risk Profile 3 Lifestyle Defensive - Risk Profile 4 Lifestyle Cautious - Risk Profile 5 Lifestyle Balanced - Risk Profile 6 Lifestyle Growth - Risk Profile 7
Cash 15% 10% 5% 4% -
Sterling Corporate Bond 21% 21% 19% 12% -
UK Index-Linked Gilts 7% 7% 4% - -
Global Investment Grade Bonds 13% 7% 4% 3% 3%
UK Gilts 12% 6% 3% - -
Global High Yield Bonds - - - 3% 4%
UK Equity 14% 18% 23% 26% 35%
Europe ex UK Equity - 5% 5% 6% 6%
North American Equity 8% 12% 16% 17% 15%
Japanese Equity 5% 5% 6% 7% 8%
Asia Pacific ex Japan Equity - 4% 5% 8% 12%
Emerging Market Equity - - 5% 9% 12%
Property 5% 5% 5% 5% 5%

Optimising portfolios over the short term

These strategic asset allocations are designed for the long term. However, short-term market developments can create opportunities (or threats) for a portfolio and our asset allocation process is flexible enough to respond to this.

Within each Lifestyle Fund, the managers can tilt away from Distribution Technology’s allocations for each sub-asset class by +/- 5%, while still remaining within the volatility bands – and therefore risk profiles – for the models. This enables them to tilt the portfolios towards investment styles more suited to benefit from prevailing market conditions.