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My asset allocation: To barbell or not to barbell?

My asset allocation: To barbell or not to barbell?

Nicola Downs, director of Surrey-based Trentham Invest, has resisted radical changes advised by the consultant she uses to guide asset allocations in her in-house portfolios.

Downs said last year many people were concerned about the negative effect of Brexit on UK markets. ‘But the world did not end,’ she said.

Instead, stock markets in the UK, US and around the world have rocketed. However, Brexit and other economic factors, such as inflation tightening monetary policy and potential interest rate rises, have led to higher risks in the property and fixed interest sectors.

Difference of opinion

In December 2016, consultant Towers Watson advised investment portfolios should allocate monies entirely away from those two asset classes towards cash. It recommended a barbell approach of investing only in cash or equities, with nothing in between, said Downs.

‘Over the past six to 12 months, the biggest changes in our portfolio models have been due to this barbell approach,’ she said. ‘Towers Watson advised this shift simply because they expect returns from cash to outstrip fixed interest.’ However, with this thinking, the firm’s cautious portfolio would have had a 63% cash holding.

‘I recommended going against this and allocating 15% into property holdings; 20% into fixed interest; and 28% into cash in the cautious portfolio. In the balanced portfolio, I recommended that ratio should be 15%:15%:17%. And, in the aggressive portfolio, I allocated 2% to property, 1% to fixed interest and 4% to cash.

‘This is because expected returns in cash are extremely low. With the base rate at 0.25% and cash interest rates similar, any growth on a portfolio will be negligible. After all fees and charges, the return could be negative.’

Trusted partner

Trentham Invest prefers active managers and does not include passive funds. The firm rebalances portfolios on a six-monthly basis. Allocations are decided by an investment committee comprising Downs and two investment strategists.

Downs said this was the first time she had made a significant modification to Towers Watson’s advice in the 14 years she has been using its guidance.

‘Using Towers Watson over that time has proven extremely fruitful,’ said Downs. ‘It has resulted in every client having profits in their portfolio, net of all fees and charges.

‘Clients are extremely happy that any given portfolio gives them the returns and alignment of their expectations.’

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