Morningstar goes for defensive asset allocation

Morningstar’s latest strategy handbook, which helps advisers with portfolio construction, has put a defensive element into its decisions due to economic uncertainty

Wednesday, November 3rd 2010, 7:42AM 1 Comment

The expert panel, which meets each quarter to review developments, noted sharemarkets had been stronger and that signalled an improved economic outlook for 2011.

It also felt the "double dip" for the US economy was now off the table.

However they were not convinced that a simple story of better times ahead was the full explanation. Part of the reason for this was that some markets, particularly emerging economies were doing well, while others like the US was highly problematic

"Panellists felt that there were still some significant uncertainties ahead for the global economy, centred on the balance sheets of the government and household sectors in the developed economies."

The corporate sector, though, looked to be in better shape.

"Pretty reasonable though not cheap" share valuations, set against very low yields on cash and fixed interest, had played the greatest part in recent sharemarket strength, Morningstar says.

Overall the Expert Panel remained wary of the outlook. Consensus forecasts are for continued recovery in the developed economies and rapid growth in the emerging world. Plenty of liquidity and very low interest rates could continue to sustain share and property markets, but the Expert Panel also noted the risks that still lay ahead from the fiscal austerity yet to come for many indebted governments.

The Panel therefore opted for a tactical positioning for the New Zealand tactical asset allocation which included plenty of insurance in case any of these uncertainties blew up down the track.

That was the group's rationale for continuing to hold benchmark or close to benchmark allocations to both New Zealand and international fixed interest, despite their very low yields - any unexpected setback to global growth expectations would see even more 'safe haven' demand for bonds.

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Comments from our readers

On 4 November 2010 at 3:55 am Collin said:

Do people check to see whether Morningstar's asset allocation strategy adds value? It would be interesting if someone could go back and test this based on historical Morningstar allocations. It seems easy to give strategy recommendations but not be 'on the hook' for outcomes.