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Asset allocation in investment
Asset allocation in investment

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4.2 Changing asset allocation over time

Activity 5 changes in benchmark asset classes over time

Timing: Allow around 30 minutes for this activity.

Check the FTSE/ WMA website [Tip: hold Ctrl and click a link to open it in a new tab. (Hide tip)] and see which asset classes have been added to those shown in Table 1. Compare the equity and bond percentages in model portfolios now with those in Table 1.

Which asset class(es) has(ve) been reduced to allow for the introduction of new asset classes?

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The latest update at the time of writing was for portfolios from June 2015.

You can also access up to date information on FTSE WMA Private investor index series asset allocation.

Table 3: FTSE/WMA model portfolio as at June 2015
Model portfolioConservative (%) Income (%)Balanced (%) Growth(%)Underlying asset index
UK equities193537.540FTSE All-Share
Non-UK equities1117.53037.5FTSE All World. ex-UK
Bonds4532.517.57.5FTSE Gilts All Stocks
Cash 5552.57 day LIBOR-1%
Commercial property5555FTSE All UK Property
Hedge funds/Alternatives15557.5FTSE/APCIMS Hedge (investment trust)

The most recent equity percentages are a maximum of 77.5% for the Growth portfolio compared with a maximum of 85% in 2000. However there is a swing towards non-UK compared to UK equities.

The equivalent figures for bonds/gilts are 45% now and were 40% in 2000. This increase can be explained by the introduction of a new model portfolio, called Conservative, which has almost half its asset allocation in bonds.

A maximum of 20% is invested in alternative asset classes – commercial property, hedge funds/alternatives - but these are used in both the low risk and higher risk portfolios. It is mostly bonds which have been reduced in importance to allow for alternatives. Note that the general term ‘bonds’ is used, rather than the more restrictive term, ‘UK gilts’, so that bonds may include high yield and/or non-UK bonds, which are riskier in sterling terms than gilts. However, the performance benchmark used is still a gilts index.

To summarise, perceptions of which asset classes to include change over time. This is partly to do with supply - for example it was relatively difficult to buy emerging market equities or bonds in the 1980s – and partly to do with demand - hedge funds, for example, can be designed to be uncorrelated with equity markets (although this does not always turn out to be the case in practice) and structured bond products can be designed to offer the particular credit rating sought by the investor.