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# 1 Model portfolios and asset classes

In this section, we look at publicly available model portfolios aimed at individual investors. Instead of tailor-making the portfolio for each individual’s specific needs – a service usually offered only to ultra-high net worth individuals with assets in the tens of millions of dollars - most individual investors are typically offered a limited range of model portfolios ranging from low to high risk. We look first at the APCIMs model portfolios and then at model portfolios based on investor questionnaires offered by an internet trading company.

A publicly available version of the model portfolio approach for individual investors is the APCIMS Private Investor Index Series, launched in the late 1990s and now called the FTSE/WMA Private Investor Index Series. At that time APCIMS offered three model portfolios aimed at providing UK private clients with benchmarks for three investment strategies: income (lower risk), balanced (medium risk) and growth (higher risk).

The FTSE/WMA index series originally included four different asset classes: UK equities, non-UK equities, UK bonds and cash. The proportions varied according to the level of risk acceptable to the client. By choosing UK equities, UK bonds and UK cash, as three out of the four suggested asset classes, the currency risk to a UK investor was minimised. The constituents of the FTSE/WMA indices have changed over time, and now include hedge funds and commercial property to provide yet further diversification. Table 1 shows the percentages recommended in 2000.

## Table 1: FTSE/WMA index weightings for different risk portfolios in 2000

Model Portfolio | Income (%) | Balanced (%) | Growth (%)
--- | --- | --- | ---
UK equities | 50 | 55 | 60
Non-UK equities | 5 | 20 | 25
UK Bonds | 40 | 20 | 10
UK Cash | 5 | 5 | 5
Total | 100 | 100 | 100

Source: http://www.ftse.com/products/downloads/FTSE_WMA_Private_Investor_Index_Series_Asset_Allocations.pdf

A broader approach to low and high risk was taken by Gregory and Rutterford, who developed a set of model portfolios in 2000, using portfolio theory optimisation and based on the then most recent ten-year historic performance of return, risk and correlation between asset classes and allowing for short-term as well as long-term investment objectives. This was also aimed at UK investors.

Gregory and Rutterford developed an investor questionnaire for an on-line broking firm for individual investors. The questions asked were divided into two sections, those relating to risk tolerance and those relating to time horizon. According to the scores in each section, one of five types of portfolio was recommended – conservative, moderately conservative, moderate, moderately aggressive and aggressive.

The model portfolios are shown in Table 2

## Table 2

Model Portfolio | %UK equities | %ROW equities | %Gilts | %Tbills | Geometric Return % | Std. Dev
--- | --- | --- | --- | --- | --- | ---
Conservative | 10% | 10% | 10% | 70% | 10.6 | 3.6
Moderately Conservative | 20% | 20% | 20% | 40% | 11.8 | 7.2
Moderate | 30% | 30% | 30% | 10% | 12.9 | 10.8
Moderately Aggressive | 50% | 30% | 15% | 5% | 13.8 | 14.0
Aggressive | 80% | 15% | 0% | 5% | 14.8 | 17.9

Here a conservative portfolio for an investor with low risk tolerance and a relatively short time horizon included 20% equities (UK and Rest of World (ROW)), 10% UK gilts and 70% Treasury bills. An aggressive investor using this set of model portfolios would invest 95% of his or her portfolio in equities.

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OpenLearn - Asset allocation in investment
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