Planit:UK Asset Allocation
From Planipedia
This document outlines all of the background information used by PlanPlus Planit in identifying asset class rates of return, efficient frontiers, model portfolio weightings and more.
Benchmark Indices Used in PlanPlus Planit for Core Asset Classes The rate of return assumptions used in the PlanPlus Planit on the Asset Allocation screen are based on an appropriate benchmark index for each asset class. Benchmark indices identify the total return (growth and income) that have been achieved historically in each asset class. When we gather this historical information we go back to 1986 as our starting point.
Below you’ll see the asset classes used for the UK, the benchmark index used for each and the period of time that the benchmark covers. (As of May 2009).
| Asset Class | Benchmark Index | Period Used |
|---|---|---|
| Cash | UK 91-Day T-Bills | 1986 – 2008 |
| Fixed Income | UK 5 Year Bonds | 1986 – 2008 |
| Global Fixed Income | JP Morgan Global Government Bond | 1986 – 2008 |
| Global Property | Citi Global Property (1) | 1990 – 2008 |
| UK Equity | MSCI UK | 1986 – 2008 |
| UK Small Cap Equity | MSCI UK Small Cap (2) | 1993 – 2008 |
| Regional Equity | MSCI European Equity | 1986 – 2008 |
| Global Equity | MSCI World | 1986 – 2008 |
| Alternatives | C.S. Tremont Hedge Fund Index (3) | 1994 – 2008 |
- ) Data from 1990
- ) Data from 1993
- ) Data from 1994
Real and Forward Looking Returns
Once we have identified the historical return for each asset class using the benchmark indices, we then subtract the historical inflation rate for the same time period to identify the real rate of return for each asset class.
We then consider the forward-looking inflation assumption being used for your client as identified on the Personal Information Screen. We add this inflation rate to the historical real rate of return to get a forward-looking return projection. It’s these forward-looking returns for each asset class that are used to project portfolio returns for your client’s current and target asset allocation. Let’s look at a simple example of this calculation:
| Historical Return for Asset Class: | 10.0% |
| Historical Inflation Rate for Same Period: | 4.0% |
| Real Rate of Return: | 6.0% |
| Client’s Forward Looking Inflation Assumption: | 3.0% |
| Forward Looking Return Projection: | 9.0% |
Keep in mind that if you increase or decrease the client’s inflation assumption on the Personal Information screen, it will also increase or decrease the forward-looking return for each asset class.
