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Asset Allocation for 2018

The past year has seen a widespread yet shallow economic recovery, and central banks have taken this as a signal to tighten monetary policy. James Norrington adjusts his tactical asset allocation portfolios to mark the end of the Goldilocks markets in 2018
Asset Allocation for 2018

Even before his untimely demise on 25 December last year, George Michael’s anthem ‘Last Christmas’ ensured his association with the festive period. Granted, the investment link is tenuous, but the lyrics “I gave you my heart, but the very next day you gave it away” are a seasonal metaphor not to take yesterday’s apparently low-risk gains for granted tomorrow. Applied to the excellent performance of our tactical asset portfolios from last Christmas, the message is not to dismiss risk in 2018 on the basis of 2017’s gains, which were achieved with remarkably low volatility.

Our two models at Christmas 2016 rebalanced portfolios from features that year and both were tactically rejigged once more in April 2017. Dating overall performance from our 16 December 2016 issue, the portfolio originally conceived as a response to the rise of populism has made total returns of over 12.2 per cent. Taking the gross redemption yield on 10-year gilts from 16 December 2016 (1.438 per cent), that’s 10.8 per cent in excess of the ‘risk-free’ rate. The more general tactical asset allocation (TAA) portfolio didn’t do quite as well, chalking up total returns of 9.8 per cent (8.4 per cent excess).

This figure for general TAA is comparable with the iShares FTSE 100 ETF (ISF), which made 9.6 per cent. Our general TAA portfolio invested in several ETFs, so allowing for these additional costs, just buying the FTSE 100 would have done better. The justification of course is that by investing more broadly we diversify some of the risks of individual asset classes such as UK shares.

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