Time To Review Your Active Asset Allocation

Monitoring the asset classes clearly needs to be done on an active basis and there seems to be no room for sentiment or manager bias. Remember, an asset class can sometimes move in a very different direction to which the fundamentals would suggest. Gilts have been a prime example of this phenomenon.

Now we have reached the half way point of the year we can look back at the various available asset classes and see how investor demand has shifted, month by month.

The table below clearly illustrates that investor sentiment towards certain asset classes can be very swift and favourites can soon become unloved and vice versa.

By analysing the table of those exhibiting the strongest trends, we can also see which areas of the market have generated the best returns since the beginning of the year.

Effectively, it shows where and how there have been structural shifts in the market place across the groups of asset classes. The figure in brackets is the asset class return of six months for those of particular note. We can see how the various asset classes, as represented by their relevant indices, have moved up and down through the ranking table as demand has strengthened and weakened.

[Over the course of the last 12 years iFunds has developed an asset class ranking system, which uses a proprietary risk adjusted momentum based process to generate a list of asset classes that are exhibiting the strongest positive trends, when adjusted for volatility. The resulting list shows what assets should form, looking at momentum alone, the basis of an ETP based, multi-asset portfolio and what asset classes should be avoided. iFunds will only invest in the top 8 to 10 via the ETP that best matches the asset class measured.]

Small and mid caps

Looking at some of the highlighted asset classes, the first quarter of the year saw mid and small cap equity indices at, or close to, the top of the table as highlighted in pink and yellow. However, they have subsequently drifted lower during the second quarter and as a result they are a good example of an asset class that investors have lost confidence in and as a result would no longer qualify for investment.

Gilts

The current top slot, highlighted in blue, is occupied by index-linked gilts and has been for several months now. This would suggest that investors are either expecting inflationary pressures to re-emerge, or they are using them as one of the few areas of the market to offer duration.

Income

Another strong indicator from the table is the demand for yield generating investments, with the majority of the top slots occupied by dividend-producing asset classes, either in the form of dividend-weighted equity indices or high yielding REIT [real estate investment trust] Indices. Whichever, it is clear that the demand for income in the current low interest rate environment is providing strong support for those assets delivering it, in contrast to the traditional cap-weighted indices.

Energy

The table also illustrates the influence of geopolitical events on certain asset classes. A good example is energy, which has reacted to the tense military situation both in the Middle East and the Ukraine. In January, the energy asset class was bottom of the table, pushed down by the continued expansion of US oil production. However, as events in the Ukraine started to develop we can witness the month by month progression of energy through the table. The situation has clearly been exacerbated by the escalation of the Syria conflict and ISIS fighters in Iraq.

Emerging markets

Emerging markets covering Asia and Latin America have made steady progress across the table after a long period of underperformance and have, over the last month, managed to establish a foothold in the top 10. This probably reflects the fact that investors are starting to acquire the asset class based on low valuations and the prospect of increased global economic activity. Even if emerging markets were to drift lower within the table over the short term, they are in a much healthier position from which to re-establish a much longer term presence as a strong performing asset class.

It has been the advent of the exchange traded fund, and the market's subsequent evolvement, that has made the implementation of an index based investment strategy feasible. But that does not mean we are not active in our review of asset classes.

Current ETF exposure includes:-

Db X-trackers FTSE EPRA/NAREIT Developed Europe Real Estate UCITS ETF

Db X-trackers MSCI EM Asia Index UCITS ETF

iShares Asia Pacific Dividend UCITS ETF

iShares EURO Dividend UCITS ETF

iShares £ Index-Linked Gilts UCITS ETF

iShares US Property Yield UCITS ETF

iShares MSCI Emerging Markets UCITS ETF

SPDR® S&P® US Dividend Aristocrats UCITS ETF

Stacey Ash is director and investment manager at iFunds Asset Management