DFM on Platform- Asset allocation analysis

25 July 2016

David Boyle – Researcher (Funds and DFM)

Asset allocation is quite simply the mix of underlying asset classes held within an investment portfolio based on an investment strategy. Each asset class behaves differently and has varying levels of inherent risk. It is reasonably well accepted amongst investment professionals that asset allocation is the most important factor in terms of portfolio performance and there have been a number of studies over the years to back this up.

The asset allocation of a portfolio is a very personal to the individual client and will likely take into account the client’s time horizon risk tolerance and personal goals. The main asset classes are equities, fixed interest securities, cash and property.

Of course you would expect, perhaps significant, differences in the asset allocations of portfolios with different risk ratings, but there are always outliers where managers have taken a view on one particular asset, are anticipating events in the market or simply taking an especially aggressive or cautious stance. We thought it might be of interest to focus on cash and property allocations pre-Brexit.

 

Asset weighting

Cash (No. of portfolios)

Property (No. of portfolios)

>50%

7

0

25-50%

8

0

10-25%

61

63

<10%

321

334

DFM on platform portfolio asset weightings as of 31/03/2016 – Defaqto Engage.

 

The table above shows the different weightings for both property and cash, as a percentage of the overall number of portfolios analysed, in this case a total of 397.

Looking at the cash figures perhaps doesn’t present much of a surprise in the current economic climate. Investment managers may have been holding more cash than usual as a buffer to dampen potential volatility and also selling off ‘riskier’ assets whilst looking for opportunities to redeploy cash at a later date.

Pre-Brexit, 81% of portfolios held less than 10% cash, with most less than 5%, as would be expected. It is also worth mentioning that some, lower risk, portfolios may be naturally geared towards a higher percentage of cash, even under normal market conditions.

Looking at the data for property exposure, we note that 84% of portfolios have less than 10% of their allocation in property. This is probably what we would expect to see in any well diversified portfolio.

Property can be selected for either a growth or income play (or both). Recent events following Brexit, reminds us that property does have a Liquidity risk, so it was surprising to see a fairly large handful of portfolios (63) with an exposure to property well over the 10% mark.

It would be interesting to know the rationale behind the March allocations and whether this position is maintained in our Q3, post-Brexit measures. We will look at this in our next edition.

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