The fundamental focus of the SAA for MyFolio is to continually enhance diversification across asset classes and maximise the potential return for each level of risk. This is done in a manner consistent with our Long Term Expected Returns (LTERs).

Considerations for SAA changes

Any enhancements made to the SAA must be compared with the alternative of making no change at all. Turnover must be considered carefully, and there must be a clear potential benefit from any changes we plan to make. Historically, we’ve made, on average, about one change every 12 months, but the frequency has increased more recently given rapidly changing market dynamics.

Market dynamics and inflation

Since the end of 2021, we’ve seen a fall in the realised volatility of equities alongside a broadly commensurate increase in bond volatility, with the correlation between the two asset types also narrowing.

It seems likely that this has been caused by inflation exceeding central bank targets. Although there have been signs that inflation is cooling, it remains stubbornly persistent. A return to pre-Covid inflation levels is unlikely.

Defensive assets strategy

The SAA already had relatively high duration in defensive assets. We’ve ensured that we have access to a variety of asset classes to give us the flexibility to adapt this rate sensitivity over time. We had benefitted from having a relatively short duration position when inflation really took off. This offered some protection from the resulting increase in interest rates. As rates rose, we added duration in anticipation of a decline in rates as central banks got inflation under control.

Although this has paid off to some degree, higher inflation may delay the expected rewards. However, we’re compensated by the higher yield these defensive assets now pay out.

Portfolio adjustments

Given the increased volatility in corporate bonds, short-term volatility rose in risk level 1 across all the MyFolio ranges. Although still within our targeted risk corridors, it felt prudent to reduce risk by reducing the equity content in these lowest-risk portfolios.

In the Managed (soon to be renamed Core) range and the Multi-Manager range, we’ve made a small reduction in diversifying defensive assets.

We also introduced infrastructure to the MyFolio Index and Enhanced ESG Index ranges. We had already added this new asset class to the MyFolio Market, Managed and Multi-Manager ranges at the end of last year.

Infrastructure offers stable, regulated cashflows and pairs well with global real estate investment trusts (REITs) for diversification within our property allocation. Given the changes in legislation for daily-dealing physical property funds, we’ve removed physical property from the MyFolio Market range and rely solely on the blend of REITs and Infrastructure.

Positioning

With limited change in both the LTERs and our view on defensive assets, positioning within defensive assets is largely unchanged. Exposure to pure government bonds and index-linked bonds now provides attractive income yield whilst maintaining some protection should inflation surprise to the upside.

Within growth assets, changes have been small. Regional equity allocations remain similar, with only small changes dictated by the LTERs. Equity allocation has changed in order to fund defensive assets or infrastructure in some portfolios.

Summary

We’ve made some small changes to our SAA to further enhance diversification and ensure appropriate risk exposure, particularly within our property allocations.

These adjustments remain consistent with our LTERs and don’t fundamentally alter our key exposures.

More choice and flexibility with MyFolio

MyFolio offers a spectrum of solutions with a range of investment styles and risk levels.

For more information about the MyFolio fund family, visit our website or speak to your local business development director.

Important information

MyFolio Managed is evolving into MyFolio Core. To learn more, read our Important Information document, or our recent article.