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Latest asset allocation quarterly reviews

March 2025 update – Review to 31 December 2024

The latest Willis Towers Watson (WTW) parameter review of the economic assumptions which underpin the optimised portfolios available through our platform sees relatively noticeable changes to asset allocations this quarter with a circa 9.3% average portfolio turnover. The story of the quarter was one of increasing yields across investment markets. 

Reallocations are typically driven by the relative changes in the return assumptions, however, this quarter there have been several additional factors impacting the changes. The relative changes of the return assumptions are still the main driver, however, we have also reviewed the total costs applied to all asset classes and the underlying makeup of the Property asset class this quarter. Overall, all asset classes see increases in their return assumptions compared to the previous quarter, as well as an accompanying increase in volatility.

Return assumption changes

The assumptions have a 10-year time horizon, which are built on a combination of both short and very long-term assumptions. The short-term assumption for Cash has increased this quarter. As risk asset return assumptions are calculated based on a risk premium above the local cash rate, the increase in Cash has in turn led to an increase in the return assumptions of all other assets. International Equity has seen a relatively large increase in return assumption when compared to the increase for UK Equity, leading to a reallocation to the former asset class from the latter. The reduction in cost for UK Fixed Interest, noted below, as well as a relatively marked increase in return assumptions, has meant a reallocation from cash into the asset class.

Review of total costs for each asset class

This quarter we reviewed the assumed costs associated with the underlying investments of each asset class.

Taking both the ongoing cost and bid/offer spreads into account, overall, there is a modest increase to the total cost assumption deduction for Property and smaller increases to UK Equity and International Equity. There is a modest reduction in the total cost assumption deduction for Cash, UK Fixed and International Fixed Interest.

Review of Property asset class

The underlying splits between Direct Property, Real Estate Investment Trusts (REITs) and Cash, which make up the Property asset class, have also been reviewed and changed. There has been a general shift towards greater use of REITs in property funds to improve liquidity.  The updated split better reflects this, and should result in more accurate return and volatility assumptions.

The increased allocation to REITs has resulted in the Property asset class behaving more similarly to Equities, thereby reducing its diversification benefits and, consequently, the optimised portfolios have increased exposure to other asset classes.

Summary of movements

  • UK cash: 10-year gross returns increased by 0.20% to 3.80% p.a. with expected volatility also increasing slightly, from 1.22% to 1.24%.
  • UK property: 10-year gross returns increased by 0.50% to 8.05% p.a. Expected volatility increased, by 0.91% to 9.30% this quarter.
  • UK fixed interest: 10-year gross returns increased by 0.45% to 5.40% p.a. Expected volatility also increased, by 0.07%, to 7.76%.
  • International fixed interest: 10-year gross returns increased by 0.55% to 4.62% p.a. with expected volatility also increasing, by 0.03% to 6.69%.
  • UK equity: 10-year gross returns increased by 0.21% to 9.03% p.a. Expected volatility also increased, by 0.02% to 17.90%.
  • International equity: 10-year gross returns have increased, by 0.46% to 9.92% p.a. with expected volatility also increasing, by 0.07%, to 20.45%.

Previous quarterly reviews