World Allocation Funds

September is a particularly busy time for reviews in preparation for the tax return deadline in mid November. At Bluewater, our investment portfolios are pretty simple. We use equities for growth and bonds or cash to dampen volatility. In carrying out our reviews, the poor performance of the bond and cash element stands out, especially when compared to equities which are up 20%+ year to date. We have to explain the reason for the presence of bonds in their portfolio and that we take a long term view on investing.

Human Nature

When we set up portfolios, we always tell clients that not everything will go up and down at the same time. It is important to look at the total figure and not just the returns of individual funds. But human nature being what it is, clients can’t help looking at the winners and want more of it.  They forget why the bonds are there in the first place and want to ditch the losers and start backing the winners. This leads to a much higher risk exposure than they originally had. When the market crashes again (and it will), they will suffer a bigger fall than expected.

World Allocation Funds

Managed funds and multi-assets funds have been around for years. Some fund managers such as Dimensional and Vanguard now have their own world allocation funds. These are a series of funds that just invest in equities and bonds, that are simply designed with five different options:

  1. 20% equities, 80% bonds
  2. 40% equities, 60% bonds
  3. 60% equities, 40% bonds
  4. 80% equities, 20% bonds
  5. 100% equities, 0% bonds

These funds rebalance on a daily basis so the asset allocation is always what you signed up for. It also takes human nature out of the equation, where you don’t want to sell the performing equities and buy underperforming bonds.

And when you look at value of your fund, you get one value and not a breakdown of equity and bond values, meaning you are less likely to make changes. Once you see the fund increasing in value, you are happy with the returns and don’t worry about what fund is performing and which one is not.

Sometimes, not being able to see under the bonnet has its benefits and saves us from ourselves.



Steven Barrett

27 September 2021