How asset allocation can achieve superior returns

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For most people, pensions or investments are not something which they want to think about. It is something which can wait, after all there are far more interesting or pressing matters to contemplate.

By Neil Worsley, investment strategist, Hedley & Co.

However, while this may be true, just a little time spent looking at our financial affairs from time to time could really bring rewards.

Most people nowadays make contributions to a pension fund but will probably pay little attention to how this is invested.

Those of us who do spend some time studying and managing our pension investment will often worry over this share or that stock and maybe something we have read in a magazine or a newspaper article which will almost certainly be UK biased.

While this is admirable, it is also missing the bigger picture that the wider world offers huge diversity and a massive array of options and investment opportunities.

In the ‘old days’ (and I am unfortunately old enough to remember these), advisors would make something like a 60/40 split between equities and bonds with the sophisticated maybe tweaking this dependant on age.

The world has now largely moved on from this but there is still some reticence and resistance to implement a more dynamic and diverse investment strategy. In short, asset allocation can play a defining role in achieving superior investment returns.

If we look at the performance of UK equities since the UK Referendum vote of last year it looks as though the stock market has been buoyant but most of this gain is merely an adjustment for the fall in the value of the Pound and once this is taken into account then UK equities have not performed nearly so well.

To make this more apparent, if we look at the returns in Sterling over the last 3 years then the FTSE 100 Index is up 23%, compare this to MSCI India +53%, MSCI China +86%, S & P (USA) +72% and even, dare I say it, continental Europe, ‘that troubled region’ +35%.

Now of course your stock picking abilities might be superb and you (or your investment advisor) may have beaten these returns, but even if this is the case, you may have missed out on some stunning returns which some focus on asset allocation might have brought.

Asset allocation is also effective in the fixed income markets, where decisions can be made over short/medium or long duration bonds, index linked securities or corporate bonds. In summary, asset allocation nowadays can play a key and important role in any investment portfolio.

It can offer diversity and opportunity and can have a much more powerful impact on a portfolio’s investment return than simply stock picking alone.

It is always wise to seek investment advice before implementing investment changes so that your personal circumstances and requirements can be properly considered. The author of this article has over 35 years experience managing investment portfolios. He spent 12 years working for a large Swiss Bank where he was Global Head of Equities, was Head of UK Equities for LV Asset Management, partner in a European hedge fund and Investment Strategist for Hedley and Co.