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Asset allocation: favouring durability and defensiveness

Last year’s portfolios failed to go off with a bang, but we are retaining some protective elements for 2019
Asset allocation: favouring durability and defensiveness

Reviewing the performance of our tactical asset allocation (TAA) portfolios from last year, was very much like opening a disappointing Christmas present. Or since I picked them, more like sheepishly watching someone else open the rubbish present you got them. Total returns of both the general and multi-factor portfolios were flat net of fees. In real terms, they are slightly down over the year.

After an excellent 2017, the portfolios were positioned defensively in anticipation of a more difficult year for the world economy, so the weak performance was not unexpected. Both portfolios had a high allocation to cash which, given UK rates are still only 0.75 per cent following the 25 basis point rise in August, was always a risk trade-off against the possibility of drawdown if equities had a bad year.

Normally, a fully invested portfolio would balance muted expectations for shares with a higher allocation to bonds. Concerns about bonds – chiefly the sensitivity of their greatly inflated prices to tightening interest rates – prompted us to take more of a barbell approach last year. The portfolios stayed heavily exposed to shares – 62.5 per cent for the multi-factor and 52.5 per cent for the general tactical asset allocation – with cash offsetting this risk. As it happened, the performance of our bond funds was similar to cash, so this tactical risk-off approach didn’t cost us.

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