Pension Asset Allocation

Masomnia

Hello all, interested in your thoughts on my potential pensions asset allocation.

I'm 26, single, don't own a property, low risk aversion. My employer pays a chunk of my salary into the scheme and then matches up to 7%, which I've taken them up on. It's a defined contribution scheme.

If you go with the standard allocation you get the lot put into their actively managed global equities fund. But this is a. boring and b. will mean I miss out in growth in other areas. So you can do your own...

Current proposed allocation is:

Emerging Markets Equities - active 25.00%
Fixed Income Bonds - passive 5.00%
Global Bond - active 5.00%
Global Equities - passive 30.00%
Property - active 15.00%
UK Equities - passive 20.00%


In terms of risk I have a very high risk tolerance - if say the EM fund collapsed 70% overnight I wouldn't lose sleep.

The inclusion of bonds is in a way a token gesture, but I think I should have at least some exposure. Since I'm planning to re-balance annually I think I may get some benefit from including them, and they're still on a decent run, still plenty of uncertainty globally. I'll re-assess my position with those when I'm 30 I think. Especially with the global bonds I think there is reasonable scope for growth still.

The main questions I suppose are whether I've allocated too much to property. I don't own a property, and I live in London with no prospect of buying any time soon. Aside from the debate about whether or not you should include your residence in your portfolio, I think I'll be missing out on potential growth if I don't include a decent amount in property while I'm renting. Perhaps I should go for more?

Also whether I've gone for too high an allocation to Emerging Markets; but as I say I have a high risk tolerance and I think this will pay off with drip feeding monthly and re-balancing.

I think also the UK equities may be a bit high, but I'm bullish on the UK and lessening the currency risk may be a good idea for the next few years. As far as I can gather the fund is basically an All-share tracker.

Options I haven't taken up comprise a diversified assets actively managed fund, index linked bonds passive, cash, sustainable, and shariah compliant. And either the opposite active/passive versions of the ones I have chosen where available.

Any input would be most welcome

bigadaj

If I were you I'm not sure I'd bother with the bond allocation at all. One thing to remember is that the U.S. Makes up not far half of the equity value in the world, so a true reflection of world markets would have 40% plus there, and obviously most UK investors have a big UK bias.

Property has growth potential but is often expensive to manage and administer, which can impact on returns, at least to small retail investors anyway.

The emerging markets allocation seems a bit strong to me, even though you have a risk tolerance, I'd either be putting a bigger allocation into global equities or targeting more into specifics, such as Asia, as emerging markets covers much of the world, and areas such as Africa, South America and Eastern Europe seem troubled to me.

purch

Dump the Bonds, up the Property

Silian

I assume you are with blackrock? (I recently changed my fund allocation with them so recognise the funds - not much to choose from over there).

If it is, your emerging markets exposure is very high. You currently have:
UK 28.99%
US 11.23%
EU 3.53%
Emerging 28.06%
Japan 1.94%

In other words, you have almost 3 times as much in emerging markets as you have in the biggest market in the world. I also have a bit of a UK bias (due to exchange rate), but almost 30% feels very high. I would personally allocate less to emerging markets and increasing global (or there is an overseas fund that excludes UK that you can use instead of the global fund to ensure that your UK isn't accidentally higher than you want)

If it isn't with blackrock, it will be different funds so my percentages might be a bit off.

I would also dump the bonds until closer to retirement if I were you.

gadgetmind

I concur with others that bonds make little sense given your age and attitude to risk, so why not look at global equities for most of your portfolio with 10%+ EM for some spice?

As for property, this was a screaming bargain during the credit crunch, but not so much now.

kidmugsy

Masomnia wrote: »

My employer pays a chunk of my salary into the scheme and then matches up to 7%, which I've taken them up on.

That's your first decision, and a good one too. As you surmise, your next big decision is asset allocation. I echo the commenters who suggest that bonds are such poor value, and you are so young, that they probably don't make much sense.

A cheap way to invest might be a passive global fund or, if you think the US market is much poorer value than most others, a global ex-US fund, if such exists. If it doesn't exist you could contrive your own by combining passive funds in the UK, Europe ex-UK, Asia ex-Japan, Japan, and EMs, or the like.

A counter-argument is that the US market is so big that you must invest in it. I don't find that persuasive myself, but each to his own.

Masomnia

Thanks all for the input. Sorry for the delay, it looked like I was going to get sacked but it's sorted

Ditched the bonds, upped the property and the global equities a bit.

Didn't really want bonds anyway!

Thanks again.

232607

Bit late to the party but I'd have considered getting a recovery fund in there, may be 10%.
A particular favourite of mine & often overlooked.

FatherAbraham

Masomnia wrote: »

Hello all, interested in your thoughts on my potential pensions asset allocation.

I'm 26, single, don't own a property, low risk aversion. My employer pays a chunk of my salary into the scheme and then matches up to 7%, which I've taken them up on. It's a defined contribution scheme.

If you go with the standard allocation you get the lot put into their actively managed global equities fund. But this is a. boring and b. will mean I miss out in growth in other areas. So you can do your own...

Seeking an "interesting" pension portfolio, rather than a boring one, is a bad sign.

Masomnia wrote: »

Current proposed allocation is:

Emerging Markets Equities - active 25.00%
Fixed Income Bonds - passive 5.00%
Global Bond - active 5.00%
Global Equities - passive 30.00%
Property - active 15.00%
UK Equities - passive 20.00%


In terms of risk I have a very high risk tolerance - if say the EM fund collapsed 70% overnight I wouldn't lose sleep.

The inclusion of bonds is in a way a token gesture, but I think I should have at least some exposure. Since I'm planning to re-balance annually I think I may get some benefit from including them, and they're still on a decent run, still plenty of uncertainty globally. I'll re-assess my position with those when I'm 30 I think. Especially with the global bonds I think there is reasonable scope for growth still.

I think there's a fundamental problem with your reasons for holding bonds. You're holding bonds both to stabilise your portfolio (and give rebalancing benefits) and to get growth from those bonds. This is somewhat contradictory. The fixed-interest part of your portfolio is there to give you the volatility-reduction and rebalancing benefits -- you should not be trying to rev it up and go for higher-risk bonds. Stick to UK gilts for this part of the portfolio.

Masomnia wrote: »

The main questions I suppose are whether I've allocated too much to property. I don't own a property, and I live in London with no prospect of buying any time soon. Aside from the debate about whether or not you should include your residence in your portfolio, I think I'll be missing out on potential growth if I don't include a decent amount in property while I'm renting. Perhaps I should go for more?

Also whether I've gone for too high an allocation to Emerging Markets; but as I say I have a high risk tolerance and I think this will pay off with drip feeding monthly and re-balancing.

Bah, everyone's pension fund has monthly drip-feeding, it's the nature of the accumulation phase.

Property assets in your pension fund are not necessarily interchangeable with your actual position of being short real estate in daily life. Your personal residence is not fungible in the same way that a unitized real-estate fund is. Therefore I wouldn't let my lack of direct real-estate assets influence my pension-fund asset allocation much.

Your EM allocation looks madly high, as if you're obsessed with return. In fact, if you invest steadily through your working life, there's probably no need to take the high risk and high cost of excessive fringe asset allocation.

Masomnia wrote: »

I think also the UK equities may be a bit high, but I'm bullish on the UK and lessening the currency risk may be a good idea for the next few years. As far as I can gather the fund is basically an All-share tracker.

Options I haven't taken up comprise a diversified assets actively managed fund, index linked bonds passive, cash, sustainable, and shariah compliant. And either the opposite active/passive versions of the ones I have chosen where available.

Any input would be most welcome

You're obsessed with return, and seem to be trying to predict which markets will do best. This is an impossible game to play, and is likely to lead to a sub-optimal outcome. Stop trying so hard.

Warmest regards,
FA