When building investment models for our clients, we need to make a whole series of assumptions about what might happen in the future.
Last year we decided to outsource the management of our asset allocation models to a specialist third-party.
They offer a powerful and sophisticated asset allocation model which is supported by a dedicated and expert Financial Analytics Team.
Like us, they accept that accurately predicting the future is not possible, but combine forward-looking and past performance analysis to more accurately forecast the most likely future outcomes.
This leads to the construction of efficient, practical and investible asset allocation strategies which can be readily aligned with client risk tolerances.
Their latest assumptions for the investment asset classes they consider made no changes to the volatility assumptions but did make the following changes to their real return expectations.
-The outlook for UK economy has improved which has impacted the bond yields across all maturities. Specifically the 5 to 15 year Index-Linked Gilts yield has risen to -0.1%, which forms the basis of our Cash assumption.
-The nominal yields for UK Gilts have increased marginally to 3.2% pa, resulting in an expected return of 0.7% pa this quarter. The yields for Index-Linked Gilts have remained stable at 0.0% pa.
-The spreads for UK Corporate Bonds have decreased by 10 bps this quarter due to increase in sovereign yields. This is reflected in our assumption of 1.3% pa this quarter.
-The assumption for International Bonds has increased by 20 bps to -0.4% pa reflecting a more positive outlook for US and German economies.
-The assumption for UK Equity has been increased to 4.6% pa, mainly due to the improved outlook for UK economy.
-The assumption for Europe ex UK Equity has been reduced by 20 bps to 3.4% due to a reduction in yields for Eurozone.
-For North American Equity the assumption has been maintained 4.0% pa from last quarter.
-For Japanese Equity we have retained the assumption of 2.5% pa from last quarter.
-For Pacific ex Japan Equity and Emerging Markets Equity we have retained the assumptions from last quarter namely of 5.0% pa and 5.5% pa.
-For UK Property we have retained the risk premium over UK Gilts, which has increased by 0.2% pa, therefore the expected return assumption has been set at 3.1% pa this quarter.
Keep in mind that these are merely assumptions used to calculate the most efficient asset allocation models for various risk profiles and do not represent any forecast of the likely return from a particular investment type over the short-term.
If you would like to find out more about our approach to delivering consistently excellent investment advice, do get in touch.
