The importance of asset allocation as an investment belief

What are asset classes?

Asset classes are simply different investment types, including equities, bonds, gilts, cash, and alternatives such as property.

These asset classes tend to perform differently depending on market circumstances and therefore provide investors with different sources of return.

We aim to create funds and portfolios that have the right mix of assets to suit your goals, objectives, and the level of risk you’re willing to take.

Why is asset allocation so important?

The 2008 financial crisis provided a classic example of why asset allocation is so important.

In general, this global financial crisis caused equities to suffer substantial losses, while bonds rose. As Sarah Ruggins, our Head of Multi Asset Research, explains: “The long line-by-line stocks and bonds you held within asset classes was still impactful, but in a secondary sense. It was the strategic asset allocation you had, or your mixture of equities and bonds, heading into that event that would have directly impacted what you experienced. It was not led by the individual assets themselves.”

Trying to time the market by moving out of equities before the next big crash is virtually impossible to do reliably and repeatedly. Rather than tactically swapping in or out of asset classes based on short-term market events, we review the strategic asset allocation of our portfolios on a forward-looking, five-to-ten-year basis – the time frame most appropriate for long-term investors.

Longer term, it’s possible to explore or forecast how asset classes may behave in different scenarios, such as higher inflation or higher interest rates. This means it tends to be easier to forecast based on asset allocation, as opposed to an individual fund manager’s ability to generate returns, or the future performance of a specific company.

Putting the belief into practice

Asset allocation is key to how we design our portfolio objectives. How your assets are allocated within your portfolio depends on what you’re trying to achieve. If you can tolerate more volatility to see potentially higher returns, a higher percentage of equities might be more appropriate. However, if you’re looking to take less risk but still want to see some good returns, then it’s more likely that you’ll be spread across bonds, equities, and alternatives.

This was fundamental when we created our InRetirement funds. These employ asset allocation to give investors a steady income, while managing risk. As we developed the funds, we analysed how different asset classes, and combinations of assets, could lead to different client outcomes. This allowed us to create a set of InRetirement funds.

In this example you can see that we considered asset allocation and the individual asset classes before we started identifying any specific investments. For us, asset allocation sets the overall tone for the portfolio up front, and after that we start looking at the finer detail such as which fund managers we’d like to use, how we can combine them most strategically, and how we can ensure the best possible performance.

Our fund range consists of ‘building blocks’ spanning all major asset classes. Through a simple and ongoing process, we can select which of these building blocks we’d like to use in our portfolios, given the asset allocation and client outcomes we’re looking to achieve.

The importance of asset allocation as a principle helps explain the recent move to add managers to our funds. For example, it helps set the fund’s overall risk level. We then populate these funds with the best combination of managers within this structure, using their expertise to ensure the best possible performance.

This is the second article exploring our seven investment beliefs. In the first, we look how they help you achieve the right outcome.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.