How have the risk profiles performed?

The 10 Dynamic Planner asset allocation models were created in 2005 and are supported by a dedicated Asset and Risk Modelling team.

The team is responsible for ensuring that the models deliver consistent and coherent results, using both forward-looking and past-performance analysis.

The models are reviewed each quarter and although no model can predict the direction of the stock market with complete precision 100% of the time, they focus on delivering results that can be relied upon to deliver higher returns for higher risk over the medium to long term.

The worst financial crisis since the great Depression of the 1930s.

On 15 September 2008, the fourth largest US investment bank, Lehman Brothers, filed for the largest bankruptcy in history, surpassing previous bankrupt giants WorldCom and Enron. Its demise made it the largest victim of the US sub-prime mortgage-induced financial crisis, which swept through global stock markets. This collapse contributed to the erosion of around $10 trillion in share values globally the following month.

On 13 October 2008, HM Treasury unveiled an emergency plan to pump £37bn of taxpayers’ money into Lloyds, HBOS and Royal Bank of Scotland in order to stop the British banking sector, and the wider economy, suffering the potentially largest recession on record.

In March 2009, the Bank of England had to cut the base lending rate to a record low of 0.5%, in response to the enveloping global financial crash. The European Sovereign Debt crisis deepened sufficiently to threaten both the solvency of the EU banking systems and the collapse of the Euro and the single currency union.

As a result, economists and fund managers ranked the financial crisis as a ‘1 in 50 or 1 in 100 year storm’ or a ‘Black Swan event’, a rare and extreme occurrence with significant consequences.

How the risk profiles performed against the markets

Diversification of assets can reduce risk; when certain asset classes fall in value, others may tend to rise.

Let’s examine how Risk Profile 5 (low medium risk) asset allocation has performed over the 10-year period to 30 June 2015, compared to the UK gilt and UK equity markets.

The chart shows Risk Profile 5 (the red line) has delivered a better and smoother performance. In other words, it has proven to be more efficient than holding just UK equities and gilts, thanks to the power of diversification.

Dynamic Planner risk profile 5 vs UK equities

How the risk profiles performed compared to each other

Each risk profile has a different target blend of asset classes, designed to create a harmonious portfolio of asset allocations, from the lowest risk level to the highest.

The asset allocation models for Risk Profiles 2 – 7 represent the most diversified portfolios in terms of the broad asset classes (cash, equity, bond or property) they invest in.

Asset allocation models for Risk Profiles 8 – 10 are considered the highest risk and are dominated by varying degrees of developed and emerging market equity assets.

Dynaimc Planner risk profiles - volatility performanceOne of the key features when setting any risk targeting asset allocation framework is that the allocations remain coherent and relative to each other.

What this means is that Risk Profile 5 is riskier than Risk Profile 4, which in turn, is riskier than Risk Profile 3 and so on.

The chart shows that over the past discrete 3, 5, and 10-year periods ending 30 June 2015, this has remained consistently true across the risk profiles.

Has taking higher risk been rewarded with higher returns?

The average 10-year performance does reflect an increasing level of return as risk is increased.

However, Risk Profiles 9 and 10 have generDynamic Planner - annual performanceally bucked the trend over the shorter time periods. This can be attributed to the higher asset allocation in Asian and Emerging Markets.

They have typically struggled in the light of the growing slowdown in the Chinese economy and strength of the US dollar, to which many of their currencies and national debt are linked. Taking more expected risk, as measured by volatility, should be rewarded by higher returns. However, it cannot be guaranteed in the shorter term.