Strategic allocation reset - navigating challenging markets


This month we focus on some of the key messages from our review of asset class return expectations and resulting strategic asset allocation (SAA) changes. For the first time in a number of years, we are making some weighty adjustments to the design of our strategic portfolios. Like our selective tactical decisions through the cycle, we expect these changes to attribute returns to clients’ portfolios over the medium term.

  • Lower bond and cash returns drive higher relative credit allocations. Return expectations for both cash and government bonds have been reduced in the latest review of our capital market assumptions (CMAs). For balanced risk profiles, while the total fixed income allocation is largely unchanged, the allocation to credit has increased relative to both cash and government bonds. For growth risk profiles, the allocation to cash and fixed income has been reduced. For all model portfolios, the allocation to cash has been reduced from 5% to 3% with the balance redirected to a new ‘short maturity’ sub-asset class in fixed income.
  • Moving to a more ‘unconstrained’ fixed income asset allocation. The distinction between domestic and international fixed income has become progressively less pronounced, with return expectations almost identical for both asset classes and correlations rising to high levels. Additionally, with yields on cash close to zero, there is increasing focus on putting more of that cash to work in more active solutions. Consequently, we have removed the distinction between domestic and international fixed income exposures and have reduced the strategic position of cash from 5% to 3% in model portfolios to partly fund a new ‘short maturity’ sub-asset class. We have also separated investment grade and high yield.
  • Raising the alternatives allocation in growth. Return expectations for our key alternative assets, namely private markets, hedge funds and real assets, remain relatively robust. For both private markets (equity and debt) and real assets, return expectations have moved moderately higher. In contrast, return expectations for hedge funds have moved lower. Consequently, within the alternatives sub-asset class, we have reduced the weight to hedge funds relative to private markets and real assets.
  • Introducing an endowment SAA. We have formally introduced an endowment SAA to our risk profiles. For endowment-style and some ultra-high-net-worth investors, typically with large corpuses, limited liquidity needs and the ability to focus almost exclusively on long-term returns, a higher allocation of alternatives may be appropriate.