Latest asset allocation quarterly reviews

The latest Willis Towers Watson (WTW) parameter review of the economic assumptions underpinning our platform’s optimised portfolios, has resulted in changes to asset allocations this quarter, with an average portfolio turnover of approximately 7%. As asset allocations remained unchanged in the previous quarter, all comparisons are made against the prior review as of 31 December 2024.

Although shifts in return assumptions continue to be the main driver of reallocations, this quarter additional factors—particularly those affecting the Property asset class—are also influencing these adjustments.

Assumption Changes

The assumptions figures are set with a 10-year time horizon and incorporate both short- and long-term (30+ years) perspectives. They are also built on a cash plus a risk premium basis. This quarter, the assumption for Cash decreased contributing to reductions in return assumptions for UK Fixed Interest , UK Equity , and International Equity. The differing degree of change between International Equity and UK Equity have prompted a reallocation from International Equity to UK Equity.

WTW has also raised the volatility assumption for Property due to increases in the beta of REITs to Global Equities, making this asset class less attractive. However, this was partly offset by a lower ongoing cost assumption for property, following an internal review.

With that latest assumptions, International Fixed Interest also sees its first allocation in more than a decade within these models, specifically across Risk Levels 2-5. This reallocation is at the expense of the cash and property asset classes.

Summary of movements

• UK cash: 10-year gross returns decreased by 0.11% to 3.69% p.a. Expected volatility is up 0.01% at 1.25%.
• UK property: 10-year gross returns decreased by 0.09% to 7.96% p.a. Expected volatility has increased by 0.35%, to 9.65%.
• UK fixed interest: 10-year gross returns decreased by 0.14% to 5.26%p.a. Expected volatility decreased, by 0.42%, to 7.34%.
• International fixed interest: 10-year gross returns increased by 0.04% to 4.66% p.a. with expected volatility decreasing by 0.02% to 6.67%.
• UK equity: 10-year gross returns decreased by 0.11% to 8.92% p.a. Expected volatility increased by 0.01% to 17.91%.
• International equity: 10-year gross returns have decreased, by 0.27% to 9.65% p.a. Volatility has also decreased, by 0.04%, to 20.41%.

The latest Willis Towers Watson (WTW) parameter review of the economic assumptions which underpin the optimised portfolios available through our platform sees relatively noticeable changes to asset allocations this quarter with a circa 9.3% average portfolio turnover. The story of the quarter was one of increasing yields across investment markets. 

Reallocations are typically driven by the relative changes in the return assumptions, however, this quarter there have been several additional factors impacting the changes. The relative changes of the return assumptions are still the main driver, however, we have also reviewed the total costs applied to all asset classes and the underlying makeup of the Property asset class this quarter. Overall, all asset classes see increases in their return assumptions compared to the previous quarter, as well as an accompanying increase in volatility.

Return assumption changes

The assumptions have a 10-year time horizon, which are built on a combination of both short and very long-term assumptions. The short-term assumption for Cash has increased this quarter. As risk asset return assumptions are calculated based on a risk premium above the local cash rate, the increase in Cash has in turn led to an increase in the return assumptions of all other assets. International Equity has seen a relatively large increase in return assumption when compared to the increase for UK Equity, leading to a reallocation to the former asset class from the latter. The reduction in cost for UK Fixed Interest, noted below, as well as a relatively marked increase in return assumptions, has meant a reallocation from cash into the asset class.

Review of total costs for each asset class

This quarter we reviewed the assumed costs associated with the underlying investments of each asset class.

Taking both the ongoing cost and bid/offer spreads into account, overall, there is a modest increase to the total cost assumption deduction for Property and smaller increases to UK Equity and International Equity. There is a modest reduction in the total cost assumption deduction for Cash, UK Fixed and International Fixed Interest.

Review of Property asset class

The underlying splits between Direct Property, Real Estate Investment Trusts (REITs) and Cash, which make up the Property asset class, have also been reviewed and changed. There has been a general shift towards greater use of REITs in property funds to improve liquidity.  The updated split better reflects this, and should result in more accurate return and volatility assumptions.

The increased allocation to REITs has resulted in the Property asset class behaving more similarly to Equities, thereby reducing its diversification benefits and, consequently, the optimised portfolios have increased exposure to other asset classes.

Summary of movements

• UK cash: 10-year gross returns increased by 0.20% to 3.80% p.a. with expected volatility also increasing slightly, from 1.22% to 1.24%.
• UK property: 10-year gross returns increased by 0.50% to 8.05% p.a. Expected volatility increased, by 0.91% to 9.30% this quarter.
• UK fixed interest: 10-year gross returns increased by 0.45% to 5.40% p.a. Expected volatility also increased, by 0.07%, to 7.76%.
• International fixed interest: 10-year gross returns increased by 0.55% to 4.62% p.a. with expected volatility also increasing, by 0.03% to 6.69%.
• UK equity: 10-year gross returns increased by 0.21% to 9.03% p.a. Expected volatility also increased, by 0.02% to 17.90%.
• International equity: 10-year gross returns have increased, by 0.46% to 9.92% p.a. with expected volatility also increasing, by 0.07%, to 20.45%.

The latest Willis Towers Watson (WTW) parameter review of the economic assumptions which underpin the optimised portfolios available through our platform sees slight changes to asset allocations this quarter with a circa 2.5% average portfolio turnover. The story of the quarter was one of decreasing yields across investment markets. 

As usual, the reallocations seen have been driven by the relative changes in the return assumptions, with only relatively minor changes in volatility this quarter. All asset classes have seen decreases in their return assumptions compared to the last update. There has also been an accompanying decrease in volatility, except for Cash, International Fixed Interest and Property - whose volatility remains unchanged from the previous quarters’ assumptions.

The assumptions have a 10-year time horizon, which are built on a combination of both short and very long-term assumptions. The short-term assumption for Cash has decreased this quarter. As risk asset return assumptions are calculated based on a risk premium above the local cash rate assumption, the decrease in Cash has in turn led to a decrease in the return assumptions of all other assets. Fixed Interest return expectations have also decreased this quarter because of a drop in short-term yields, however we expect these to trend upwards over the longer term.

Summary of movements

• UK cash: 10-year gross returns decreased by 0.27% to 3.60% p.a. with expected volatility unchanged at 1.22%.
• UK property: 10-year gross returns decreased by 0.28% to 7.55% p.a. Expected volatility is unchanged at 8.39%.
• UK fixed interest: 10-year gross returns decreased by 0.25% to 4.95% p.a. Expected volatility also decreased, by 0.18%, to 7.69%.
• International fixed interest: 10-year gross returns decreased by 0.47% to 4.07% p.a. with expected volatility unchanged at 6.66%.
• UK equity: 10-year gross returns decreased by 0.29% to 8.82% p.a. Expected volatility decreased by 0.03% to 17.88%.
• International equity: 10-year gross returns have decreased, by 0.26% to 9.46% p.a. Expected volatility has also decreased, by 0.02%, to 20.38%.

The latest Willis Towers Watson (WTW) parameter review of the economic assumptions which underpin the optimised portfolios available through our platform sees slight changes to asset allocations this quarter with a circa 4% average portfolio turnover. The story of the quarter was one of increasing yields across investment markets.  Note that because the asset allocations were left unchanged last quarter, our comparison is against the review done to 31 December 2023.

As usual, the reallocations seen have been driven by the relative changes in the return assumptions, with only relatively minor changes in volatility this quarter. All asset classes have had increases in their return assumptions compared to the last assumptions update, and an accompanying increase in volatility, with the exception of both Cash and UK equity, the latter reducing in volatility.

The assumptions have a 10-year time horizon, which are built on a combination of both short and very long-term assumptions. The short-term assumptions for Cash have increased this quarter and, as risk asset returns are calculated based on a risk premium above cash (local cash rate) assumption, this increase has in turn increased the return assumptions of all other assets. Fixed Interest return expectations have increased in the latest expectations, in line with an expected upwards trend over the longer term.

As mentioned in last quarter’s review, WTW made two methodology changes which has made UK equities relatively more attractive – this is notable considering its lower expected volatility, shown below, whereas the expected volatilities of other asset classes have increased.  During this quarter we took the opportunity to update our expense assumption for UK equities to incorporate UK stamp duty reserve tax (SDRT). SDRT is incurred when buying the underlying securities in UK equity funds (0.50% on purchases) and typically passed on via tools such as dilution levies.

The WTW and SDRT changes had largely offsetting impacts, which is why there is relatively low turnover across the portfolios.

Summary of movements

• UK cash: 10-year gross returns increased by 0.50% to 3.87% p.a. Expected volatility is unchanged at 1.22%.
• UK property: 10-year gross returns increased by 0.51% to 7.83% p.a. Expected volatility has very marginally increased by 0.05%, to 8.39%.
• UK fixed interest: 10-year gross returns increased by 0.58% to 5.20% p.a. Expected volatility also increased, by 0.13%, to 7.87%.
• International fixed interest: 10-year gross returns increased by 0.69% to 4.54% p.a. with expected volatility increasing by 0.21% to 6.66%.
• UK equity: 10-year gross returns increased by 0.53% to 9.11% p.a. Expected volatility decreased by 0.13% to 17.91%.
• International equity: 10-year gross returns have increased, by 0.22% to 9.72% p.a. Volatility has also increased, by 0.59%, to 20.40%.

After careful consideration, we have opted not to implement the updated Asset Allocation assumptions from Willis Towers Watson (WTW) this quarter. This also means that the asset allocations will be held at the current level for another quarter. We explain our reasoning below.

WTW methodology changes

Each quarter WTW create assumptions based upon their view at quarter end. We conduct due diligence on these assumptions and adjust them according to the effect of ongoing and bid-offer costs. The assumptions are then used alongside an optimiser to create efficient portfolios at each risk level.

Ordinarily, the WTW assumption changes each quarter will be driven by market data, but this quarter they have also made two methodology changes. Firstly, the WTW model has been updated to enhance the way in which the volatility of an aggregate portfolio (e.g. international equities) is derived from the component parts (e.g. regional equity indices). This change in modelling approach had an impact on the volatilities of these aggregate portfolios, in particular increasing the volatility of international equities.

At the same time, the long-term assumption for the UK ‘country risk premium’, which is the differential between the UK and US real cash assumptions (with US being a proxy for ‘global’), has been raised by 0.25%, from -0.25% to 0.0%. This means that the UK real cash rate assumption, which was previously 1.00%, is now 1.25%. As other UK asset classes are calibrated relative to cash, this increase also uplifted UK equity returns assumptions.

The overall WTW assumptions are adjusted using short-, medium- and long-term assumptions. This change in long-term UK country risk premium assumptions has meant that all asset classes have seen an increase in expected return. This includes non-UK asset classes as, from the perspective of a UK investor, returns hedged back to sterling have also risen by 0.25%.

Alongside these WTW calculations, partly impacted by its methodology change, all asset classes show an increase in volatility, except for UK equities, which have reduced from the previous quarter.

The combination of the change in methodology, increase in UK country risk premium and the resulting WTW assumptions has made UK equities relatively more attractive.  However, the asset allocation model does not currently take UK stamp duty reserve tax into account, which are incurred when buying the underlying securities in UK equity funds (0.50% on purchases) and typically passed on via dilution levies.  In addition, the existing asset allocations already reflect a significant home bias (and with that an unintended sector and style bias). 

Therefore, we believe it is in the best interest of our customers to leave the asset allocations unchanged this quarter whilst we update our assumptions to also allow for UK stamp duty reserve tax, as this will avoid unnecessary turnover in portfolios.

The latest Willis Towers Watson (WTW) parameter review of economic assumptions which underpin the optimised portfolios available through our platform had noticeable changes to asset allocations this quarter with a circa 10% average portfolio turnover, with the story of the quarter being one of decreasing yields across investment markets.

As per usual, the reallocations seen have been driven by the relative changes in the return assumptions, with relatively minor changes in volatility this quarter. All asset classes this quarter have had reductions in their return assumptions compared to the last update 3 months ago, and an accompanying reduction in volatility, with the exception of both cash and UK property.

The assumptions have a 10-year time horizon, which are built on a combination of both short and very long-term assumptions. They are calculated on a risk premium in addition to the risk-free rate (local cash rates). The short-term assumptions for Cash have reduced this quarter and, as equity returns are calculations based on a risk premium above cash assumption, this reduction has in turn reduced the 10-year return assumptions of both UK and International Equity. Fixed Interest return expectations have reduced as a result of a decrease in yield, although this is expected to trend upwards over the longer term.

Summary of movements

• UK cash: 10-year gross returns reduced by 0.50% to 3.37% p.a. Expected volatility is unchanged at 1.22%.
• UK property: 10-year gross returns reduced by 0.51% to 7.32% p.a. Expected volatility has very marginally increased by 0.02%, to 8.34%.
• UK fixed interest: 10-year gross returns also reduced by 1.02% to 4.62% p.a. Expected volatility also reduced, by 0.19%, to 7.74%.
• International fixed interest: 10-year gross returns reduced by 0.90% to 3.85% p.a. Expected volatility reduced slightly by 0.01% to 6.45%.
• UK equity: 10-year gross returns reduced by 0.53% to 8.58% p.a. Expected volatility also decreased by 0.04% to 18.04%.
• International equity: 10-year gross returns have reduced, by 0.38% to 9.50% p.a.  Volatility has also decreased, by 0.03%, to 19.81%.

The latest Willis Towers Watson (WTW) parameter review of economic assumptions which underpin the optimised portfolios available through our platform had noticeable changes to asset allocations this quarter with a 13% average portfolio turnover, effectively reversing a number of the changes seen in the previous quarter.

As per usual, the reallocations seen have been driven by the relative changes in the return assumptions, with relatively minor changes in volatility this quarter. The majority of the asset classes this quarter have had reductions in their return assumptions compared to the last update 3 months ago, apart from both international equity and international fixed income.

The assumptions have a 10-year time horizon, which are built on a combination of both short and very long-term assumptions. They are calculated on a risk premium in addition to the risk-free rate (local cash rates). The short-term assumptions for UK Cash have reduced this quarter, which has reduced the 10-year return assumptions of UK Equity. However, International Equity’s return assumption has increased due, in part, to the increase in both US Dollar and Euro Cash rates. This has driven a reallocation from UK Equities towards International Equity, a reversal of the allocation changes seen in the previous quarter.

Summary of movements

• UK cash: 10-year gross returns reduced by 0.38% to 3.87%p.a. Expected volatility is unchanged at 1.22%.
• UK property: 10-year gross returns reduced by 0.39% to 7.83%. Expected volatility is also unchanged.
• UK fixed interest: 10-year gross returns also reduced by 0.13% to 5.64% p.a. Expected volatility increased slightly, from 7.89% to 7.93%.
• International fixed interest: 10-year gross returns increased by 0.31% to 4.75%. Expected volatility increased slightly by 0.02% to 6.46%.
• UK equity: 10-year gross returns reduced by 0.40% to 9.11% p.a. Expected volatility also decreased by 0.05% to 18.08%.
• International equity: 10-year gross returns have further increased by 0.18% to 9.88%. Volatility has very marginally increased by 0.01%, to 19.84%.

The latest Willis Towers Watson (WTW) parameter review of economic assumptions which underpin the optimised portfolios available through our platform had noticeable changes to asset allocations this quarter with a 12% average portfolio turnover compared with only 2% last quarter and 18% the quarter before.

Usually, the reallocations are typically driven by relative changes in the return assumptions. This quarter there have been several additional factors impacting the changes. The relative changes of the Return Assumptions are still the main driver, but there is also an increase to UK Fixed Interest’s volatility assumption, a relative decline in the cost assumptions for Property, and an assessment of the International Equity split that impacted this review.

All the asset classes this quarter have had increases in their return assumptions compared to the last update 3 months ago. The assumptions have a 10-year time horizon, which are built on a combination of both short and very long-term assumptions. They are calculated on a risk premium in addition to the risk-free rate (local cash rates). The short-term assumption for UK Cash has jumped and has driven up 10-year return assumptions. However, International Equity’s assumption has not increased as much as UK equity. This is because US Dollar and Euro Cash rates have not increased by as much as Sterling. This has driven a reallocation from International Equity towards UK Equities.

We also reviewed the costs associated with the underlying investments of each asset class. Property had a relative reduction in the associated total costs. This is because of lower weighted average bid-offer spreads and lower ongoing costs. The net impact was a 0.08% increase in the return of Property (net of costs) relative to Cash, causing a reallocation from Cash & UK Fixed Interest to Property. UK Fixed Interest was shunned in preference to Property due to a 0.14% increase in volatility.

Summary of movements

• UK cash: 10-year gross returns jumped by 0.85% to 4.25%p.a. Expected volatility is unchanged at 1.22%
• UK property: 10-year gross returns increased by 0.87% to 8.22%. Expected volatility is also unchanged.
• UK fixed interest: 10-year gross returns increased by 0.93% to become 5.77% p.a. Expected volatility increased from 7.75% to 7.89%.
• International fixed interest: 10-year gross returns increased by 0.72% to 4.44%. Expected volatility jumped by 0.44% to 6.44%.
• UK equity: 10-year gross returns surged by 0.90% to 9.51% p.a. Expected volatility increased by 0.07% to 18.13%.
• International equity: 10-year gross returns had a comparatively incremental increase of 0.10% to 9.70%. Volatility is marginally down at 19.83% from 19.86%

As mentioned above, this quarter, we also reviewed the International Equity split, which is used to pro-rata allocate to the regions. The regions are subject to a review of the Gross Domestic Product (GDP) weights. The result was 2% increases to Far East ex Japan & North American Equity. With offsetting reductions to Japan and Europe ex UK. Emerging markets was unchanged after the review whereas Global Specialist is a static component fixed at 15% allocation despite the review. This is summarised in the table below.

View the Standard asset allocations as at September 2023

The latest Willis Towers Watson (WTW) parameter review of economic assumptions underlying the optimised portfolios available through our platform resulted in minor changes to asset allocations this quarter. This update also impacts the risk level calculations available through the platform.

There are minor changes to the models this quarter. The return assumptions of all the asset classes this quarter have minor decreases compared to the last update 3 months ago. This was primarily down to a decrease to the UK cash assumption as this impacts all other asset class return assumptions as well, as they are typically calculated as a risk premium over the local cash return.

Summary of movements

• UK cash: 10-year gross returns decreased by 0.21% to 3.40% p.a. Expected volatility is unchanged at 1.22%.
• UK property: 10-year gross returns decreased by 0.21% to 7.35%. Expected volatility is also unchanged.
• UK fixed interest: 10-year gross returns decreased by 0.27% to become 4.84% p.a. Expected volatility dropped to 7.75% from 7.90%.
• International fixed interest: 10-year gross returns decreased by 0.39% to 3.72%. Expected volatility decreases by 0.02% to 6.00%.
• UK equity: 10-year gross returns decreased by 0.22% to 8.61% p.a. Expected volatility decreased by 0.07% to 18.06%.
• International equity: 10-year gross returns fell by 0.13% whilst volatility is marginally less at 19.86%.

All asset classes received a modest reduction in return expectation driven by the reduction to the cash assumption. There is comparatively little change to the long term expected volatilities, with UK Fixed Interest the exception with a 0.15% reduction in volatility.

These minor changes have resulted in minor moves from Property & UK Fixed Interest with redistribution to Cash, UK Equity and International Equity. This quarter the average impact is a portfolio turnover rate of 2%, compared with 18% last quarter.

View the Standard asset allocations as at June 2023

Following the latest review of assumptions that underpin our portfolios by Willis Towers Watson (WTW), there are significant changes to the asset allocations this quarter.

Firstly, a reminder that last quarter, Quilter opted not to implement changes to the portfolios suggested by WTW’s modelling. Due to market instability following the September mini budget, we believed there would be a very high likelihood of the proposed, very large portfolio changes being unwound this quarter. That decision has been largely justified as on average 39% of the would-be transactions would have been unwound across each portfolio this quarter. That said, there are still significant changes to asset allocations this period.

This quarter, the return assumptions for all the asset classes see major increases when compared to the last update we did, back in September 2022 (based on the review to June 2022). The persistence of inflation and escalations in central bank interest rates have resulted in an increase in the cash rate assumptions. This impacts all other asset class return assumptions as well, as they are typically calculated as a risk premium over the local cash return.

Summary of movements (Dec 2022 vs Jun 2022)

• UK cash: 10-year gross returns increase by 1.29% to become 3.61% p.a. Expected volatility went down by 0.01% to 1.22%.
• UK property: 10-year gross returns increased by 1.32% p.a. to 7.56%. Expected volatility declined to 8.32%.
• UK fixed interest: 10-year gross returns jumped by 1.66% to reach 5.11% p.a. Expected volatility also jumped to 7.90%.
• International fixed interest: 10-year gross returns increased by only 0.96% to 4.11% p.a. Expected volatility here decreased by 0.01% to 6.02%.
• UK equity: 10-year gross returns increased by 1.35% to become 8.83% p.a. Expected volatility also increased to 18.13%.
• International equity: 10-year gross returns went up by 0.44% to become 9.73% p.a. Expected volatility is up to 19.87%.

So, all asset classes received an increase in their return expectations but with comparatively little change to their long term expected volatility. It is the relative change in expected return that impacts the redistribution of asset allocations.

International Equity had a smaller uplift than UK Equities, causing a rotation from International Equity into UK Equity.

Within the asset classes of comparatively lower volatility, UK Fixed Interest’s 1.66% increased expected return compared to cash’s 1.29%, caused a rotation out of cash into UK Fixed Interest.
International Fixed Interest remains unused by our suite of models.

As ever, if advisers wish to allocate to this asset class via an optimised portfolio or exclude an asset class, the option to amend the minimum and maximum allowed allocation is available within the edit model portfolio functionality.

View the Standard asset allocations as at March 2023

The latest Willis Towers Watson (WTW) parameter review of economic assumptions underlying the optimised portfolios available through our platform resulted in changes to asset allocations this quarter. This also impacts the risk level calculations available through the platform.

There are material increases in the return assumptions of all the major asset classes again this quarter. The continued rapid rise of inflation and the resultant increases in interest rates from central banks has resulted in an increase in the cash rate assumption.

There is a jump in cash returns, with ten year expected returns increasing by another 0.68%. This has a knock-on impact upon all other asset class return assumptions as well, as they are typically calculated as a risk premium over the cash return.

Summary of movements

The latest Willis Towers Watson (WTW) parameter review of the economic assumptions underlying the optimised portfolios available through our platform resulted in changes to asset allocations this quarter. This also impacts the risk level calculations available through the platform.

There are material increases in the return assumptions of all the major asset classes this quarter. The rapid rise of inflation and increases in central bank interest rates has resulted in an increase in the cash rate assumption. The level of volatility driven by inflation has also caused a recalibration of the return assumptions.

There is a jump in cash returns, with ten year expected returns increasing by 0.68%. This impacts all other asset class return assumptions as well, as they are typically calculated as a risk premium over the cash return.

During the quarter we also reviewed the bid-offer spreads in the Property sector, as this forms part of our overall expense assumption for investing in property. This assumption decreased marginally caused mainly by the closure of a fund with a 5% bid-offer spread. We do not apply such deductions to the other asset classes due to the availability of alternative charging options on funds available which aren’t such a barrier to investment.

Summary of movements

• UK cash: 10-year gross returns increase by 0.68% to 1.64% p.a. Expected volatility is up slightly to 1.22%
• UK property: 10-year gross returns increased by 0.69% p.a. Expected volatility is again static at 8.34%.
• UK fixed interest: 10-year gross returns increase again by 0.85% to become 2.50% p.a. Expected volatility increases marginally to 7.97%
• International fixed interest: 10-year gross returns increased by 0.67% to 2.10% p.a. Expected volatility decreases by 0.05% to 6.05%.
• UK equity: 10-year gross returns increase by 0.71% to become 6.77% p.a. Expected volatility increases marginally to 17.93%.
• International equity: 10-year gross returns jump by 1.13% to become 8.35% p.a. Expected volatility is up to 19.78%.

Although all asset classes received an increase in return expectation, but with comparatively little change to their long term expected volatility, it is the relative change in expected return that impacts the redistribution of asset allocations this quarter. International Equity had a larger uplift than UK Equities, causing a rotation from UK to International Equity.

Within the lower volatility asset classes, UK Fixed Interest’s 0.85% increased expected return compared to cash’s 0.68%, tipped the balance - causing a modest move within our models from Cash to UK Fixed Interest.

International Fixed Interest remains unused within our models. As ever, if advisers wish to allocate to this asset class via an optimised portfolio, the option to amend the minimum allowed allocation is available within the edit model portfolio functionality on the platform.

View the Standard asset allocations as at June 2022

The latest Willis Towers Watson (WTW) parameter review of the economic assumptions underlying the optimised portfolios available through our platform has resulted in changes to asset allocations this quarter. This also impacts the risk level calculations available through the platform.

The expected rate for cash follows market forward rates, except for the very long term where it reverts to WTW’s normative assumption.  Market forward rates have generally decreased over the quarter for all periods except the very short term, which therefore resulted in a decrease in the nominal expected return on cash. With growth assets modelled as a cash plus risk premium, and with no changes to the risk premium assumptions, growth assets such as equity and property had similar decreases.

Gilt yields reduced over the quarter and, all else being equal, this would normally decrease the expected return for UK fixed interest. However, this also resulted in less mean reversion being assumed in the model, which means that less capital losses are expected to happen over the next 10 years. In addition, credit spreads have increased by circa 9 bps and collectively this has resulted in an increase in the expected return for UK fixed interest compared to the previous quarter. This has also been coupled with a jump of 0.77% to the volatility assumption.

Summary of movements

Willis Towers Watson (WTW) have completed their review of the economic assumptions that underly the optimised portfolios available through our platform. Following this review, there are some changes to the asset allocations this quarter, as well as some additional changes to our processes and assumptions that were previously communicated to you.

Current economic and market conditions remain far from the average historical levels. A key question when modelling long-term asset returns is therefore the pace at which these conditions normalise. WTW have decided to slow down the pace of reversion of yields over the medium term and extended the maximum reversion period so that normatives are reached by year 40 instead of year 30.

The above has resulted in a sizeable increase in the return assumption for UK Fixed Interest. It impacts the 10-year return for UK Fixed interest because less reversion will take place over that period, therefore resulting in lower capital losses from yield reversion. Additionally, we reviewed and updated the proportion of Gilts to Corporate bonds for inclusion in the UK Fixed Interest assumption. The overall result is an increase to return assumption of 0.41% p.a.

There is also an increase to cash rates, with ten year expected returns rising by 0.14%. This impacts all other asset class return assumptions as well, as they are typically calculated as a risk premium over the risk-free rate, the risk-free rate being cash.

Summary of movements

The latest Willis Towers Watson (WTW) parameter review of the economic assumptions underlying the optimised portfolios available through our platform has resulted in small revisions to asset allocations this quarter. WTW continue to state that the Covid-19 pandemic reinforces their belief that the range of future economic outcomes remains unusually wide. This uncertainty has implications for how investment assumptions should be used, as a broader range than usual might now be plausible. WTW accept that others might reasonably form assumptions that differ significantly from their own.

Over the quarter there was a slight reduction in the expected returns across most asset classes. Ten year expected returns for cash fell to 0.91% p.a. from 1.00% p.a. and these influenced projected returns on other assets as well. The projected expected return for UK equities fell from 6.10% to 6.01% p.a. The projected expected returns for UK Fixed Interest was the biggest faller, dropping by 0.17% to 1.11%.

Summary of movements

• UK cash: 10-year returns have fallen by 0.09% pa. Expected volatility is unchanged
• UK fixed interest: 10-year returns have declined by 0.17% p.a. Expected volatility increased 0.10%
• International fixed interest: 10-year returns have decreased by 0.05%. Expected volatility increased by 0.05%
• UK equity: 10-year returns have deteriorated by 0.09% pa. Expected volatility was relatively flat, falling only 0.01%
• International equity: 10-year returns have reduced by 0.05% pa. Expected volatility was negatively impacted by 0.02%
• UK property: 10-year returns have decreased by 0.09% pa. Expected volatility increased modestly by 0.01%

View the standard asset allocations as at September 2021.

The latest Willis Towers Watson (WTW) parameter review of the economic assumptions underlying the optimised portfolios available through our platform has resulted in revision to asset allocations this quarter. WTW continue to state that the Covid-19 pandemic reinforces their belief that the range of future economic outcomes remains unusually wide. This uncertainty has implications for how investment assumptions should be used, as a broader range than usual might now be plausible.

Over the quarter there was a sharp increase in the expected returns across most asset classes. Ten year expected returns for cash rose to 1.00% p.a. from 0.34% p.a., and these influence projected returns on other assets such as equities and fixed income. The projected expected return for UK equities rose to 6.10% p.a. from 5.40% p.a. The projected expected returns for UK commercial property fell to 3.50% p.a. from 3.61% p.a. following our latest review of bid/offer spreads.

Summary

• UK cash: 10-year returns have risen by 0.66% pa. Expected volatility has risen by 0.10%
• UK fixed interest: 10-year returns have risen by 0.84% pa. Expected volatility fallen by 0.90%.
• International fixed interest: 10-year returns have risen by 0.41%. Expected volatility decreased by 0.35%.
• UK equity: 10-year returns have risen by 0.70% pa. Expected volatility higher by 0.10%.
• International equity: 10-year returns have risen by 0.57% pa. Expected volatility decreased by 0.09%.
• UK property: 10-year returns have decreased by 0.11% pa. Expected volatility decreased by 0.01%.
• These changes have led to changes in the optimised asset allocations this quarter with a generally small decrease in Cash and International Equity and higher UK Equity holdings.
  
  View the standard asset allocations as at June 2021.

March 2021 update – Review to 31 December 2020

The latest Willis Towers Watson (WTW) parameter review of the economic assumptions underlying the optimised portfolios available through our platform has resulted in revision to asset allocations this quarter. WTW continue to state that the Covid-19 pandemic reinforces their belief that the range of future economic outcomes remains unusually wide. This uncertainty has implications for how investment assumptions should be used, as a broader range than usual might now be plausible.

Over the quarter there was a minor decrease in the expected returns across all asset classes. Ten year expected returns for cash fell from 0.38% p.a. to 0.34% p.a., and these influence projected returns on other assets such as equities and property. The projected expected return for UK equities fell from 5.61% p.a. to 5.40% p.a. The projected expected returns for UK commercial property also fell from 3.76% p.a. to 3.61% p.a.

• UK cash: 10-year returns have fallen by 0.04% pa. Expected volatility was unchanged.
• UK fixed interest: 10-year returns have fallen by 0.28% pa. Expected volatility decreased by 0.58%.
• International fixed interest: 10-year returns have risen by 0.09%. Expected volatility decreased by 0.08%.
• UK equity: 10-year returns have fallen by 0.21% pa. Expected volatility deceased by 0.94%.
• International equity: 10-year returns have fallen by 0.11% pa. Expected volatility decreased by 0.88%.
• UK property: 10-year returns have decreased by 0.15% pa. Expected volatility decreased by 0.42%.

• UK cash: 10-year returns have fallen by 0.04% pa. Expected volatility was unchanged.
• UK fixed interest: 10-year returns have fallen by 0.28% pa. Expected volatility decreased by 0.58%.
• International fixed interest: 10-year returns have risen by 0.09%. Expected volatility decreased by 0.08%.
• UK equity: 10-year returns have fallen by 0.21% pa. Expected volatility deceased by 0.94%.
• International equity: 10-year returns have fallen by 0.11% pa. Expected volatility decreased by 0.88%.
• UK property: 10-year returns have decreased by 0.15% pa. Expected volatility decreased by 0.42%.

The latest Willis Towers Watson (WTW) review of the economic assumptions underlying the optimised portfolios available through our platform has resulted in revision to asset allocations this quarter. WTW continues to state that the Covid-19 pandemic reinforces their belief that the range of future economic outcomes remains unusually wide. This uncertainty has implications for how investment assumptions should be used, as a broader range than usual might now be plausible.

Over the quarter there was a minor decrease in the expected returns across all asset classes. Ten year expected returns for cash fell to 0.38% p.a. from 0.43% p.a., and these influence projected returns on other assets such as equities and property. The projected expected return for UK equities fell to 5.61% p.a. from 5.68% p.a. The projected expected returns for UK commercial property also fell from 3.82% p.a. to 3.76% p.a.

• UK cash: 10-year returns have fallen by 0.05% pa. Expected volatility was unchanged.
• UK fixed interest: 10-year returns have fallen by 0.01% pa. Expected volatility increased by 0.33%.
• International fixed interest: 10-year returns have fallen by 0.07%. Expected volatility increased by 0.01%.
• UK equity: 10-year returns have fallen by 0.07% pa. Expected volatility decreased by 0.15%.
• International equity: 10-year returns have fallen by 0.06% pa. Expected volatility decreased by 0.05%.
• UK property: 10-year returns have decreased by 0.06% pa. Expected volatility decreased by 0.04%.

These small changes have led to only minor changes in the optimised asset allocations this quarter.

View the standard asset allocations as at January 2021

The latest Willis Towers Watson (WTW) review of the economic assumptions underlying the optimised portfolios available through our platform has resulted in a revision to asset allocations this quarter. WTW continues to state that the Covid-19 pandemic reinforces their belief that the range of future economic outcomes remains unusually wide. This uncertainty has implications for how investment assumptions should be used, as a broader range than usual might now be plausible.

Over the quarter there was a decrease in the expected returns across all asset classes with larger falls in the level of UK and international fixed interest and lower falls in UK equity compared to international equity. Ten year expected returns for cash fell from 0.59% p.a. to 0.43% p.a., and these influence projected returns on other assets such as equities and property. The projected expected return for UK equities fell from 5.87% p.a. to 5.68 p.a. The projected expected returns for UK commercial property also fell from 4.04% p.a. to 3.82% p.a.

• UK cash: 10-year returns have fallen by 0.16% pa. Expected volatility decreased by 0.03%.
• UK fixed interest: 10-year returns have fallen by 0.67% pa. Expected volatility deceased by 0.08%.
• International fixed interest: 10-year returns have fallen by 0.75%. Expected volatility decreased by 0.04%.
• UK equity: 10-year returns have fallen by 0.19% pa. Expected volatility deceased by 0.10%.
• International equity: 10-year returns have fallen by 0.60% pa. Expected volatility decreased by 0.02%.
• UK property: 10-year returns have decreased by 0.22% pa. Expected volatility decreased by 0.03%.

This has led to changes in the optimised asset allocations with a decrease in UK fixed income exposure across the optimised portfolios’ ratings and an increase in real assets, particularly UK equity holdings.

View the standard asset allocations as at September 2020

The latest Willis Towers Watson (WTW) parameter review of the economic assumptions underlying the optimised portfolios available through our platform has resulted in revision to asset allocations this quarter.  WTW states that the Covid-19 pandemic reinforces their belief that the range of future economic outcomes remains unusually wide. This uncertainty has implications for how investment assumptions should be used, as a broader range than usual might now be plausible.

Over the quarter there was a decrease in the expected returns across cash and real asset classes (UK cash, UK and international equity and property) with a small rise for UK and international fixed interest. Ten year expected returns for cash fell to 0.59% p.a. from 1.40% p.a., and these influence projected returns on other assets such as equities and property. The projected expected return for UK equities fell to 5.87% p.a. from 6.52% p.a. The projected expected returns for UK commercial property also fell to 4.04% p.a. from 4.81% p.a.

• UK cash: 10-year returns have fallen by 0.81% pa. Expected volatility decreased by 0.04%.
• UK fixed interest: 10-year returns have risen by 0.20% pa. Expected volatility increased by 0.43%.
• International fixed interest: 10-year returns have risen by 0.10%. Expected volatility increased by 0.10%.
• UK equity: 10-year returns have fallen by 0.65% pa. Expected volatility increased by 0.98%.
• International equity: 10-year returns have fallen by 0.34% pa. Expected volatility increased by 0.90%.
• UK property: 10-year returns have fallen by 0.51% pa.

This has led to changes in the optimised asset allocations with an increase in UK fixed income exposure and a decrease in UK equity holdings across the optimised portfolios.

View the standard asset allocations as at June 2020

The latest Towers Watson (WTW) parameter review of the economic assumptions underlying the optimised portfolios available through our platform has resulted in some revision to asset allocations this quarter.

Over the quarter there was an increase in the expected returns across all asset classes (UK cash, UK and international fixed interest, UK and international equity and property). Ten year expected returns for cash rose to 1.40% p.a. from 0.84% p.a., and these influence projected returns on other assets such as equities and property. The projected expected return for UK equities rose to 6.52% p.a. from 5.93% p.a. The projected expected returns for UK commercial property also rose to 4.81% p.a. from 4.24% p.a.

• UK cash: 10 year returns have risen by 0.56% pa. Expected volatility increased by 0.10%.
• UK fixed interest: 10 year returns have risen by 0.24% pa. Expected volatility decreased by 0.15%.
• International fixed interest: 10 year returns have risen by 0.30%.
• UK equity: 10 year returns have risen by 0.59% pa. Expected volatility increased by 0.10%.
• International equity: 10 year returns have risen by 0.35% pa.
• UK property: 10 year returns have risen by 0.57% pa.

We have generally seen minor changes in the optimised asset allocations albeit with a slight increase in property and UK equities and a decrease in cash and international equities across the optimised portfolios.

View the standard asset allocations as at March 2020

The latest Towers Watson (WTW) parameter review of the economic assumptions underlying the optimised portfolios available through our platform has resulted in some revision to asset allocations this quarter.

Over the quarter there was a decrease in the expected returns across all asset classes (UK cash, UK and international fixed interest, UK and international equity and property). The WTW Investment Committee undertook its annual review of yields and cash rates over the quarter. Following this, the UK real cash return assumption was reduced by approximately half a percent, bringing the UK country risk premium (the real cash assumption in the UK relative to the US) down to the same level as the Eurozone and Japan.

Accordingly ten year expected returns for cash fell from 1.28% p.a. to 0.84% p.a., and these influence projected returns on other assets such as equities and property. The projected expected return for UK equities fell from 6.39% p.a. to 5.93% p.a. The projected expected returns for UK commercial property also fell from 4.69% p.a. to 4.24% p.a.

• UK cash: 10 year returns have decreased by 0.44% pa. Expected volatility decreased by 0.06%.
• UK fixed interest: 10 year returns have decreased by 0.35% pa. Expected volatility increased by 0.21%.
• International fixed interest: 10 year returns decreased by 0.27%.
• UK equity: 10 year returns have decreased by 0.46% pa.
• International equity: 10 year returns have decreased by 0.34% pa.
• UK property: 10 year returns have decreased by 0.45% pa.

We have generally seen minor changes in the optimised asset allocations albeit with a slight increase in cash and international equities, and a decrease in property and UK equities across the optimised portfolios.

View the standard asset allocations as at December 2019

The latest Towers Watson review of the economic assumptions underlying the optimised portfolios available through our platform has resulted in some revision to asset allocations this quarter.

Over the quarter there was a decrease in the expected returns across all asset classes (UK cash, UK and international fixed interest, UK and international equity and property). Long term volatility was broadly unchanged for all asset classes.

Ten year expected returns for cash fell from 1.38% p.a. to 1.23% p.a., and these have a tendency to influence projected returns on other assets such as equities and property. The projected expected return for UK equities fell from 6.45% p.a. to 6.29% p.a. The projected expected returns for UK commercial property also fell from 3.49% p.a. to 3.34% p.a.

We have generally seen minor changes in the optimised asset allocations albeit with an increase in UK equites and a decrease in international equities of up to 5% across the optimised portfolios.

Following recent feedback, we are going to alter the way we quote economic returns in future updates. Historically the returns have been quoted gross of adviser fees, product/service fees and most additional active management fees that could apply for a typical fund in each asset class. However the stated returns have allowed for the deduction of some passive expenses (active for property) for assumed institutional funds for each asset class.      

Going forward we have decided to show a fully gross figure, not including the passive deductions. This will change the figures as follows:

View the standard asset allocations as at September 2019

The latest Towers Watson review of the economic assumptions underlying the optimised portfolios available through our platform has resulted in revisions to asset allocations this quarter.

Over the quarter there was a decrease in the expected returns across all asset classes (UK cash, UK and international fixed interest, UK and international equity, and property). Long term volatility was broadly unchanged for all asset classes.

10 year expected returns for cash fell from 1.61% p.a. to 1.38% p.a., and these have a tendency to influence projected returns on other assets such as equities and property. The projected expected return for UK fell from 6.70% p.a. to 6.45% p.a. The projected expected returns for UK commercial property also fell from 3.73% p.a. to 3.49% p.a.

We have generally seen little change in the optimised asset allocations with a small increase in UK equites and a decrease in international equities across the optimised portfolios.

View the standard asset allocations as at June 2019

The latest Towers Watson review of the economic assumptions underlying the optimised portfolios available through our platform has resulted in revisions to asset allocations this quarter.

Over the quarter there was a decrease in the expected returns across all asset classes (UK cash, UK & International fixed interest, UK & International Equity and Property). Long-term volatility was broadly unchanged for all asset classes.

Ten-year expected returns for cash fell from 1.90% p.a. to 1.61% p.a. and these have a tendency to influence projected returns on other assets such as equities and property. The projected expected return for UK fell from 6.99% p.a. to 6.70% p.a. The projected expected returns for UK commercial property also fell from 4.02% p.a. to 3.73% p.a.

With the fall in expected cash returns we have generally seen a slight decrease in the cash allocations, with a small increase in property and UK equities across the optimised portfolios

View the standard asset allocations as at March 2019