Asset allocation and added value As we always say, asset allocation is the key driver of returns. What we have consistently done over time is to reduce equity when it is higher and top this up when it drops. This has made a significant difference to returns. Chart 7 shows all the changes we’ve made over the past five years. It is called an area chart and so, for example, when the red area is bigger that means we have more equity, and when smaller we hold less equity. Balanced Portfolio Asset Allocation Changes
Chart 7
100%
90%
7000
80%
70%
6500
60%
50%
6000
40%
Equity 30%
Alternative Equity
5500
Defined Returns
20%
10%
Property Fixed Interest
5000
Cash 01/10/2015
01/04/2015
01/10/2014
01/04/2014
01/10/2013
01/04/2013
01/10/2012
01/04/2012
01/10/2011
01/04/2011
01/10/2010
0%
Chart 8
Overlaid on this area chart is a line showing the FTSE 100 level over the same period. This neatly illustrates how we have been able to take advantage of market dips when they occurred in the past, and bank gains when markets rise. When the line goes down – the red area gets bigger and vice versa! This may seem like a common sense approach, however you would be surprised how often we see the exact opposite. Investors often top up equities as markets rise and their confidence increases. They often sell when markets fall as they become nervous. It sometimes requires a strong investment discipline to sell high and buy low. The benefits of our active approach to asset allocation are shown in chart 8. This shows the performance of our balanced portfolio since launch, compared to all the constituent parts. For example, where the table says “balanced equity” it is our mix of equity funds, including all changes, over the same period.
70% 60% 50% 40% 30% 20% 10% 0% Commercial Property
EQ Balanced Equity Mix
EQ Fixed Interest
EQ Alternative Equity
Our balanced portfolio has outperformed all of its constituent parts. Even if we had been able to predict which asset class would provide the best returns (alternative equity), and invested 100% of the portfolio in that asset class, we would have returned less than our balanced portfolio. This illustrates the importance of asset allocation and adapting the weighting of each asset class to market conditions.
EQ Balanced Model * Property returns based on the past performance of two funds now held in the portfolio. At times we have not held property in portfolios. All figures shown without fees deducted.
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