Risk Profiling and the current bond market
PeterM
Member
We currently use FinaMetrica for risk profiling.
However, the recent issues around bonds (or 'defensive assets' as FinaMetrica classes them) means that some of our lower risk clients are looking at some large drops due to the levels of bond content in their portfolios. Vanguard Life Strategy 40% for example is down 13.38% over the last 12 months according to FE.
What is everyone doing about this in terms of asset allocation and do any of the other tools take account of what is going on with bonds when suggesting an asset allocation based on a risk score?
Is it just a case of the bond market going through a one off blip and telling clients to sit tight given that equities are not looking much better, or should we be thinking about some defensive equity funds or multi-asset funds like Troy Trojan, Ruffer Total Return etc and if how do you square that with FinaMetrica's outputs?
Comments
VLS has a poor asset allocation in terms of both its equity (UK biased with no robust reasoning other than "UK clients prefer UK equities" ie marketing) and its fixed interest (predominantly medium to long dated UK govt issues). It's also not risk targeted in that it operates a fixed weight strategic allocation that isn't designed to predict or respond to current risks. I'm not sure if it's all hedged back to sterling too?
"It's only when the tide goes out that you learn who has been swimming naked" is an appropriate quote for VLS.
On the other hand, portfolios holding globally diversified short-dated investment grade corporate and sovereign debt have faired much better.
Whether you consider the last two months means the end for UK sovereign debt as a defensive asset in your portfolio is a huge, and very active, call to make. Switching out a low cost index fund (albeit with comparatively poor construction amongst its peers) for high cost active "flavour of the moment" fund managers would seem premature to me.