What should you Asset Allocation be in 2010?

Greg Flash from Alphen Asset Management writes that asset classes in 2009 were a mixed bag and looks at options for 2010.

Because of the strengthening rand, local assets far out-performed global assets (in rands). Investing in local equities would have given you a 32% return, with local property also being very respectable with a 14% return. The next best return was from local cash with 8%, followed by the change in the gold price in rands of a little over 7%. Global equities provided a small positive return with 1.6% and local bonds would have lost you 1% over the year. The really bad performers were global cash (USD) and global bonds with -22% and -21% respectively. Subtract almost 6% for inflation and you have your real returns for each of these assets.

The big question, is how one should be positioned currently for a year that is certainly going to be interesting in terms of asset class movements.

To get some insight into what the local asset management industry is thinking, I have compiled historical and current (as at end December 2009) asset allocations for ten of the more prominent retail unit trusts in the AA Prudential Variable Equity category. This category is made up of 51 funds accounting for R73bn of investor’s money and is one of the more competitive categories of funds where it could be argued that stock selection and asset allocations should reflect the general “house views” of each of the respective management houses.

One of the big questions investors are currently asking is how much offshore assets they should be holding.

From the above graph (Figure 1), it seems that asset managers are relatively positive on offshore assets. On average, these managers have close on 18% offshore assets, which would indicate that, on average, managers are relatively positive on offshore assets – mindful that the maximum allowed weighting is 20%. Another thing to consider is how this offshore/local asset allocation has changed over the last couple of years.

As can be seen from Figure 2, the offshore allocation on average has increased over the last year and a half. However, this is somewhat misleading, as the maximum allowed offshore weighting was 15% and was increased to 20% during this period.

Looking at individual asset classes, both locally and offshore, there are some trends that are playing out (see Figure 3 below).

Apart from an increase in local bond weightings, it appears that global equities and global bonds have been increased in favour of domestic equities and domestic cash.

At Alphen, equities remain our preferred asset class to generate inflation-beating returns on a medium-term view. Our definite preference is for quality global assets which can be acquired at fair valuations and have the additional optionality of a weakening in what has been a strongly performing rand.

In conclusion, based on how asset managers are voting with their feet, it appears that equities are still the preferred asset class, with a increasing preference for foreign equities