Jan 21

Tactical Asset Allocation in the Defensive part of the portfolio

I received a call from an adviser earlier in the week who wanted my opinion in terms of increasing a client’s allocation to Colonial’s cash account and reducing the allocation to Colonial’s Diversified Fixed Interest fund. For 2008 these 2 funds returned around 6.5% and 0.1% and the adviser’s thoughts were that these returns suggested perhaps the switch was appropriate. Now, whilst we know the past doesn’t equal the future, I believe this tactical switch is not appropriate for other tactical reasons as follows…

·         An earlier post in this blog shows the direction of interest rates and that is clearly down…so increasing allocations to cash should not yield spectacular returns by any stretch of the imagination

·         The reason Colonial’s Diversified Fixed Interest only returned 0.11% wasn’t because of conservative bonds (which had wonderful 2008 returns) but because of credit exposure.

·         Given credit spreads are still quite high whilst conservative interest rates locally and globally are at record lows suggests to me that the return potential in 2009 does not rest with cash or bonds but in credit related securities like corporate bonds…therefore, reducing the allocation to Colonial’s Diversified Fixed Income is reducing the return potential and increasing the allocation to cash is virtually guaranteeing another low return

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