- AJ Bell’s Strategic Asset Allocation (SAA) for 2025 outlines the changes made to AJ Bell’s range of investment solutions, including its funds and Managed Portfolio Service (MPS)
- AJ Bell Investments’ assets under management have grown significantly over the past two years, from £2.8 billion to £6.8 billion
- China remains attractive but flexibility is key and moving to an EM ex-China structure should provide opportunity to control China allocations
- Markets could have been complacent regarding inflation
- Concentration risk in the US has risen to levels that need specific attention
James Flintoft, head of investments solutions at AJ Bell, comments:
“As we kicked off 2025, many investors will have been reassessing their portfolios and how their asset allocation stacks up against the current global market and economic climate, and that is no different across AJ Bell’s range of investment solutions. There are three key themes that underpin the changes we’ve made to our SAA this year and we’ve outlined the rationale behind this process below.”
EM ex-China
“We have been monitoring the benefits of moving to using Emerging Markets ex-China for a while and now see sufficient products available that are efficient and come at a low-cost to enable allocations to EM ex-China and China independently.
“Chinese equities were way too cheap in the first half of 2024. The strong rally later in the year has seen some of that value realised. We are trimming the China allocation a little to reflect the greater control we now have. This is not us suddenly becoming negative on the prospects for China, but hints at the flexibility offered by the EM ex-China structure. Those stuck with Chinese equities intertwined within Asia and Emerging Market ETFs and funds could end up hamstrung when it matters most.”
Bonds and inflation
“There is an argument that investors have been napping with regards to inflation and government deficits and are now being forced to wake up to the risks these present to bond markets. Central bankers have been trying to take credit for the cooling of inflation in 2024, however the UK and US have been beneficiaries of deflation from China which is largely unacknowledged. Low and in some cases negative goods price changes could quickly reverse and act as a springboard to the persistent inflation in the service sector. Whilst we’re not predicting a sudden upwards spiral for inflation and yields, investors do need to consider how big a tail risk these are. We could easily be in the foothills of another leg up in yields and they are not compensating us for taking this risk.
“Gilts are being given a risk premium because of the risks around stagflation. The UK has a decent record of sticking by its obligations and has not had to turn to the IMF since 1976. Whilst the UK does not have the privileges associated with the US dollar, some of the concern over the credit risk of the UK is likely to be overplayed, but we feel shorter duration is key with gilts.
“We took more duration risk in the US throughout 2024, but we also see a risk to the upside in US yields and an unattractive risk/reward profile for long duration, especially for more cautious portfolios. We’ve therefore wound back that duration and started taking advantage of what we feel is attractive pricing within the TIPS markets, where a real yield of 1.5-2.0% is possible.”
Equity concentration risk
“Diversification has gone out of the window in some major markets and concentration is building in key areas. The Magnificent Seven are not only driving performance in the US but also contributing significantly to world equity indices. We feel it is prudent to start thinking about managing that concentration risk in the US specifically, rather than relying on broad geographic diversification to do all the heavy lifting.”