Trendy Asset Allocation

Mike Turner, Research Manager (Funds and DFM)

In an attempt not to sound like an article from a glossy fashion magazine, in this article we explore the latest trends in Asset Allocation over the last year within the Risk Targeted Multi Asset space.

The below table illustrates the average increase/decrease in asset allocation for the year prior to end Q3 2015, with a star next to the significant shifts.

On 16^th December the US Fed Reserve increased interest rates by 25 basis points to 0.5%, we can see from the table above that fund managers have been moving away from North American Equity. The move away from North American Equity took place before the Fed announced the increase in interest rates. The interest rate rise was on the cards for a while causing uncertainty in the markets which could have been a reason for the move away from North American equities in an effort for fund managers to de-risk their portfolios, or in anticipation of a reduced equity risk premium.

We can see that fund managers moving away from North America have predominantly moved the allocation into Cash and UK Government bonds. When markets are uncertain, cash is often used as an allocation to safeguard against losses and bonds historically are viewed as less volatile than equities.

As mentioned fund managers have increased exposure to UK Government bonds, in an environment where there’s speculation that interest rates will rise, interest rate risk can be a concern. As interest rates increase, yields of existing bonds will also increase thereby causing the prices of existing bonds to decline. We can measure the sensitivity of a bond price to changing interest rates using duration, which is a weighted average of the timing of a bond’s coupon payments, as measured in years.

We can see there’s only been a small move away from UK Equity and with fund managers increasing exposure to UK Government Bonds, could it be that fund managers aren’t expecting UK Interest rates to rise just yet?