AJ Bell funds asset allocation update

Each January, we review the asset allocation of the AJ Bell growth funds. This process sees us assess the expected returns and risks of the funds’ four asset classes (stocks, bonds, alternatives and cash), across various geographies and sectors. We then decide the appropriate weightings to hold in each before settling on a final investment mix for each fund.

We recently completed this process for 2020. Below are the updates we’ve made, which include adding two new asset classes, changing asset weighting, and replacing some underlying funds that we hold.

New asset classes

1. US government bonds (with 7-10 years to maturity)
2. International bonds (£ hedged)

Our review told us that adding the above two asset classes to certain AJ Bell funds would improve their risk and return characteristics. For the Cautious and Moderately Cautious Funds, we’ve now included international bonds (£ hedged), and for the Cautious, Moderately Cautious and Balanced funds we’ve added US government bonds (with 7-10 years to maturity).

These are the investments we’ve used to gain our exposures to these asset classes:

Weighting changes

In the Cautious, Moderately Cautious and Balanced funds, we have slightly upped the weightings for shares and cash, and reduced the weightings for bonds and alternatives (currently invested in UK property). We’ve done this because bonds and alternatives increased in value in 2019, reducing the returns we are likely to see from them going forward.

In the Moderately Adventurous, Adventurous and Global Growth funds, we’ve kept allocations very similar to 2019. This is because these funds already had smaller weightings in bonds and alternatives.

View weighting changes

Next, let's look in turn at changes we've made within each asset class.

Shares

Shares in US and UK markets showed strong gains in 2019, depressing the returns we would expect to see from them in 2020 and beyond. As such, our changes have largely seen us move away from these more developed regions in favour of emerging markets and the Asia Pacific region – which look more promising from a valuation and growth perspective.

Another region we have reduced exposure to is Japan. Despite attempts to make its companies more shareholder friendly, Japan has been unable to overcome weak economic growth relative to other regions and we don’t foresee any improvement in its economy in the near future.

Bonds

As mentioned above, the AJ Bell funds now incorporate two new bond asset classes: international bonds (£ hedged) and US government bonds (7-10 years to maturity). These additions were funded, in the main, by a reduction in the weights of UK government and UK corporate bonds.

And we have slightly reduced the overall weighting of bonds in the bond-heavier funds (typically the lower-risk ones). This is because bonds enjoyed good gains throughout 2019, as central bankers continued to offer their support to markets with loose monetary policy. This increase in bond prices has steepened the price of an already expensive asset class, reducing their likely returns.

Alternatives and cash

We’ve reduced the weighting of alternatives in the lower-risk funds, while keeping the weighting for higher-risk funds relatively unchanged.  

The rationale behind this is similar to that for bonds. Strong gains in UK property (what we currently use for alternatives) in the wake of the UK election, along with the calming of the Brexit uncertainty, has meant that the attractive discounts on property no longer apply. This higher valuation squeezes the returns we’re likely to see going forwards. As a result we’re reducing the UK property exposure in the Cautious, Moderately Cautious and Balanced funds.

As for cash, we’ve slightly increased its weightings in the Cautious, Moderately Cautious and Balanced funds. This is to maintain the risk levels of these funds following the changes discussed above.

Underlying investment changes

The only changes we’ve made to the fund’s underlying investments is in the emerging markets and Asia Pacific stocks.  

To achieve exposure to Asia Pacific shares, the funds currently invest in iShares Core MSCI Pacific ex-Japan ETF. This tracks the MSCI Asia Pacific ex-Japan index, but the index doesn’t include any holdings in South Korea. So we’ve chosen to switch to a fund that does include South Korea – the Vanguard FTSE Developed Asia Pacific ex-Japan ETF – to provide a more diverse mix. As an added benefit, the new fund is priced at 0.15%, against the old fund’s 0.20%. So not only will our exposure be more in line with what we are hoping to achieve from our asset allocation, it will be at a cheaper price for you.

We currently achieve exposure to emerging market shares by investing in the iShares Core MSCI EM IMI UCITS ETF. Priced at 0.18%, this was the cheapest way to invest in this area. But in January 2020, HSBC cut the price of their equivalent product, the HSBC MSCI Emerging Markets UCITS ETF, from 0.40% to 0.15%. This makes it the most competitive in the market (on an OCF basis), with the added benefit that it tracks the exact index we use in our asset allocation (the iShares product tracks a slightly broader index from same MSCI family). So we’ve decided to make the switch from the iShares ETF to the HSBC ETF across all of our funds.

Emerging market shares feature prominently in the Global Growth fund. But owing to regulations on holding sizes, it holds more than one investment in this asset class. Its secondary holding, at the moment, is the Vanguard FTSE Emerging Markets UCITS ETF, priced at 0.20%. But we're switching it to the cheaper iShares Core MSCI UCITS ETF, priced at 0.18%.

Please visit the AJ Bell funds page for more information on the funds' asset allocation and view their factsheets.

View AJ Bell funds

These articles are for information purposes only and are not a personal recommendation or advice.

AJ Bell funds weighting changes

AJ Bell Cautious fund

AJ Bell Moderately Cautious fund

AJ Bell Balanced fund

AJ Bell Moderately Adventurous fund

AJ Bell Adventurous fund

AJ Bell Global Growth fund

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