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FOR FINANCIAL ADVISERS ONLY
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Building a portfolio

Having agreed a client’s attitude to risk, you can use our portfolio builder tool on Wealth Interactive and Insite to construct a portfolio to try and help deliver the investment outcomes they expect. The tool provides sample asset allocations designed to maximise returns for your client’s agreed risk level. 

Our asset allocations take into account a set of assumptions, provided by a leading investment consultancy, Towers Watson, about economic conditions. The asset allocations are reviewed quarterly. Nobody can forecast the future, but by following a strategic approach to asset allocation, backed by robust, forward looking economic data, you can build portfolios that have a greater probability of matching your clients’ expectations.

When building portfolios yourself, our portfolio builder tool also gives you the flexibility to alter and adjust the assets within a portfolio. So, if a client wants less exposure to a particular asset class for example, the tool can accommodate this. 

Measuring risk

The most common measure of risk in investments, and the method used in our investment tools, is the standard deviation of investment returns; in other words, by how much returns may move up and down relative to their long-term average rate of return. Historically, over most periods, the returns from equities have been the most volatile:

Measuring risk

Reducing portfolio risk through diversification

Old Mutual International’s approach to investments, and our investment tools, is based on Modern Portfolio Theory. The fundamental principle of Modern Portfolio Theory is that one should consider the risk of the portfolio as a whole, and not individual assets in isolation. While individual assets do have a bearing on the overall level of risk the investor is exposed to, the correlation between the assets in the portfolio has an even greater bearing.

This is because different assets perform differently at different times, so Modern Portfolio Theory recommends including a range of assets within a portfolio to manage risk by diversification, essentially not having all your eggs in one basket.

Most of the benefits of diversification are at major asset class level, i.e. cash/money markets, fixed interest, international fixed interest, property, UK equity and international equity. Further diversification benefit can be found within international equity, i.e. the split between North America, Europe, Japan, Far East, emerging markets and global specialist, and this is determined in the economic review data we receive from Towers Watson that is updated quarterly.

Further Information

Once you have identified your client’s level of risk by using our Risk Profiler, our Asset Allocation engine uses a process called ‘Mean Variance Optimisation’ to produce a portfolio with the highest mathematically expected return for your client’s level of risk. In Modern Portfolio Theory, this is called the ‘efficient frontier’.

Crucially, the portfolio as a whole is matched to the level of risk appropriate for your client. Many investors can be tempted to pick only funds that are popular at the time of investing. This results in a portfolio that is not necessarily aligned to their risk level, nor effectively diversified. The risk levels are mapped with an expected portfolio volatility level. This process also underpins the asset allocations used when constructing our model portfolios.

When self-building a portfolio, you have the flexibility to exclude asset classes if required or to limit the maximum weighting of a particular asset – but this may mean that the portfolio is no longer optimised for the customer’s individual risk profile.

Once you have a portfolio optimised for the client’s level of risk, you can then consider where that portfolio is being used.

The asset allocations for our Managed Solutions funds are optimised for the type of investment they are – a fund. This includes the ability to add an element of tactical asset allocation overlaid on the long term strategic asset allocation, to take advantage of shorter term trends and investment opportunities.

To help you with the asset allocation process, we provide regularly updated standard asset allocation tables. The tables show the current standard asset allocations for each risk score, for Old Mutual International’s Model Portfolios.

However, due to ever-changing markets, the Old Mutual International asset allocations are subject to change without notice.

Follow the links below to view the latest asset allocation for each Managed Solution fund and charts and tables for each model portfolio.

Further Information

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