Cost reductions and changes to our Strategic Asset Allocation
19 August 2024
The Strategic Asset Allocation (SAA) is the long-term target allocations across the various asset classes in the models. The amount in equities, bonds and alternatives hasn’t changed. Within equities we increased US equities and reduced Europe, Asia and emerging markets equities. For bonds, we reduced the allocation to US corporate bonds and emerging market bonds and increased the allocation to government bonds.
Our tactical asset allocation, which is our shorter-term views, remains the same; we continue to have more in developed market equities and less in bonds.
- We’ve seen a few weaker economic data points lately, however nothing that indicates a drastic change to the economic outlook in our view.
- Company earnings remain solid; US company profits are being led by healthcare and technology companies. We expect this to broaden to other sectors in the second half of this year. Technology stocks have benefited from a strong run of positive sentiment but this is not a 2001 bubble as the rally has been underpinned by improving earnings. One of the concerns is unprofitable Artificial Intelligence investments. In our view it’s too early to make a judgement on this, but profitability will become increasingly important.
- Japanese companies faced heavy selling pressure in early August which brought the price to earnings ratio (a valuation measure) to the October 2023 low. In our view, this was an overreaction with robust earnings in the latest reporting season and corporate reforms continuing.
- In bonds we are more comfortable investing in UK bonds where expectations for rate cuts (two from the Bank of England by year end) look more realistic than in the US. In the US, much swifter falls in interest rates are anticipated, which seems unlikely in our view.
Asset Allocation changes:
More in US equities and less in other regions: We have increased the allocation to US equities in the Passive and Hybrid ranges. We continue to have less US equity than most of our competitors as company valuations reflect a rosy outlook for long-term growth in earnings. However, given the rise in the allocation to the US within global equities over the last few years and the unique companies within it, the exposure needed to be increased to maintain a similar relative view.Europe, Asia and emerging market equities were reduced to increase the US. The portfolios continue to have higher allocations to regions such as Japan, Europe and Asia than peers as we see better future stock market growth coming from these regions.
Less in US corporate bonds and more in government bonds: The amount investors get paid to invest in corporate bonds over government bonds has declined to low levels compared to history. In contrast, the yields of government bonds are attractive.
Fund changes:
Cheaper share classes: We reduced the OCFs of the models by switching to cheaper share classes for some passive funds: L&G Global Infrastructure fund, L&G All Stocks Gilt Index fund, L&G EM Govt Bond US$ Index fund and L&G EM Govt Bond Local Currency Index fund.UK corporate bond passive fund: We changed the UK corporate bond index tracker to a fund that tracks a broader corporate bond index which we think will perform better over the long-term (iShares Corporate Bond Index UK).
Reducing US dollar exposure: The Passive models have more exposure to the US dollar. We see more positive signs for sterling due to better economic data and less political instability. We have reduced the US dollar exposure by hedging some US equities.
Portfolio Ongoing Charges Figure (OCF) Reductions
| Model | Previous OCF | OCF following rebalance | Change |
| Passive 1 | 0.16% | 0.14% | -0.02% |
| Passive 2 | 0.16% | 0.13% | -0.03% |
| Passive 3 | 0.15% | 0.13% | -0.02% |
| Passive 4 | 0.13% | 0.11% | -0.02% |
| Passive 5 | 0.11% | 0.10% | -0.01% |
| Model | Previous OCF | OCF following rebalance | Change |
| Hybrid 1 | 0.36% | 0.32% | -0.04% |
| Hybrid 2 | 0.39% | 0.34% | -0.05% |
| Hybrid 3 | 0.41% | 0.36% | -0.05% |
| Hybrid 4 | 0.44% | 0.38% | -0.06% |
| Hybrid 5 | 0.46% | 0.38% | -0.08% |
| Model | Previous OCF | OCF following rebalance | Change |
| Global ESG Themes 1 | 0.48% | 0.46% | -0.02% |
| Global ESG Themes 2 | 0.49% | 0.47% | -0.02% |
| Global ESG Themes 3 | 0.50% | 0.48% | -0.02% |
| Global ESG Themes 4 | 0.50% | 0.48% | -0.02% |
| Global ESG Themes 5 | 0.51% | 0.49% | -0.02% |
Past performance is not a reliable indicator of future performance. The value of an investment can go down as well as up and your client may get back less than they’ve paid in.
