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Asset allocation process and assumptions

Strategic asset allocations are used for the following investment solutions:

  • Our WealthSelect Managed Portfolio Service (MPS).
  • The portfolio construction tools available through our platform.

When you invest clients’ assets with us, you have access to risk-matched optimised asset allocations. These are produced in accordance with Modern Portfolio Theory (MPT) and are reviewed on a quarterly basis.

The process

The economic assumptions that underpin the financial models are verified by Willis Towers Watson. Their role is advisory and involves the production of a quarterly parameter review report.

The report examines the underlying assumptions used for the investment solutions listed above and, if required, recommends changes to them. Adjustments to these underlying assumptions may then result in changes to the asset allocations.

Whilst the theory and volatility targets underpinning these investment solutions are the same, the asset allocations for each may not be identical. Any variation will result from slight differences in the assumptions and how they are applied, for example:

  • Asset allocation changes are likely to be implemented less quickly for a client’s portfolio than by a fund or portfolio manager with rebalancing done at potentially different times and frequencies.
  • The return and correlation assumptions for WealthSelect MPS are more refined due the limited number of funds available to the manager.
  • The MPS Portfolios employ a dynamic approach to strategic asset allocation.
  • There is a lower fee assumption for WealthSelect funds based on our negotiating power.
  • Taxation of the funds is different to the tax assumptions accounted for within the investment tools at wrapper level.

It is important to remember that the assumptions used are based on a longer-term view and may not necessarily reflect short-term idiosyncrasies of the markets. More specifically, the report covers the following.

  • The return and volatility parameters for various asset classes.
  • Correlations between returns on asset classes.
  • The risk levels for each of the ten Quilter risk profiles.
  • Distribution yields as a percentage of total returns for each relevant asset class.
  • The appropriate geographical splits for international equities.
  • A commentary on the rationale for any changes to parameters.
  • Implied asset allocations for each of the risk levels.

More information