The search for diversification
The barometer saw a further move away from fixed income allocations in ‘conservative’ portfolios. These portfolios have been shifting into other asset classes ahead of anticipated changes in the interest rate environment in developed markets.
PRCG data also found adviser portfolios continuing the trend, noticed in previous barometers, of moving allocations away from domestic UK assets.
Due to a lack of currency hedging, specifically in equity allocations, this has helped drive returns for UK portfolios recently as a result of a weaker pound following last year’s Brexit vote. However, in the future this lack of currency hedging is also a potential risk linked to the future changes in the value of Sterling.
Kinsey-Quick said: “Assuming the greater a portfolio’s diversification, the better it might perform during a risk event, ‘aggressive’ models to us are not well-diversified, and should be considered as essentially equity-only portfolios from a risk perspective. Achieving diversification in an equity -dominant portfolio is becoming ever more challenging due to the lack of asset classes and strategies delivering the same, high level of recent returns associated with equities.
“Balancing return expectation with a durable risk profile may be becoming more difficult for advisers. Yet in spite of these challenges, our view is that there are strategies that can improve diversification with only partial impact to performance, and it is worth advisers searching their investment universe more thoroughly to source such opportunities.”
Colin Bloodworth says:
The problem is that there is no clear, universally accepted definition of what constitutes a conservative, balanced, growth or aggressive portfolio. Each manager or institution has its own interpretation. The holdings in one fund or portfolio manager’s ‘balanced’ portfolio may be described as ‘conservative’ or ‘growth’ by another manager holding similar assets.
Until the industry can come up with clear definitions of what asset allocations would be appropriate for each category confusion will prevail.