Strategic Asset Allocation changes to the Nikko AM Diversified Funds

The Nikko AM diversified funds are designed to provide investors with a carefully constructed mix of asset classes in a manner that 
aims to optimise returns for a given level of risk. We consider that conservative, balanced and growth funds should invest in a range 
of sectors including domestic and international assets. We also consider utilising alternative assets where appropriate. That is where 
we think they can meaningfully contribute to a better risk-adjusted return considering; the underlying investment approach, the 
extent leverage or esoteric strategies are used, and overall fees paid by the end investor.

We undertake a review of the Diversified Funds (Nikko AM Wholesale Conservative Fund, Nikko AM Wholesale Balanced Fund and 
the Nikko AM Wholesale Growth Fund) at least annually, and more frequently if conditions change materially. This includes 
considering the most appropriate investment strategies for each asset class, and reviewing the strategic asset allocations (SAA). The 
SAA is driven both by qualitative and quantitative rationales.

2024 Review

Following our 2024 review, the Investment Committee has agreed to adopt the following changes to the strategic asset allocation
recommended by Alan Clarke, Portfolio Manager of Diversified Funds & External Managers.


1. The Funds used to gain exposure to global share markets will be changed
Currently the Diversified Funds have an allocation to the Global Shares Fund (Nikko Europe) plus an allocation to the ARK 
Disruptive Innovation Fund. We are replacing this combination with the Global Equity Multi-Manager Fund (WCM, Nikko Europe, Royal London and JP Morgan). We believe this combination of four underlying managers will give a better risk-adjusted return with less volatility in both absolute and relative terms.


2. The Multi-Manager Alternatives Fund will be removed
We have made the decision to remove the MMAF Fund from our Diversified Fund allocations. This strategy was appropriate for investing in the era of ZIRP (Zero-Interest Rate Policy) that prevailed in the years following the global financial crisis. Now interest rates have normalised and the forecast real returns for cash and bonds are much higher, we believe this alternative strategy is no longer required when considered in terms of risk-adjusted returns after fees. We have retained an allowable range of 0-10% for ‘Alternative Assets’, but the neutral SAA weight for this will be set at zero for now.


3. Property will be added to the Growth Fund
We consider property a ‘growth’ asset, and while it has many traits and characteristics in common with listed equities, it typically has a different return profile and provides diversification to listed equities. As our Growth Fund has a large allocation to ‘growth assets’, we believe this fund will benefit from an allocation to Property over the full market cycle.


4. We have introduced ranges around each asset class weighting in the SAA to allow for tactical tilting of the portfolios
The strategic asset allocation will now include an allowable investment range, typically +/-10% around the ‘neutral’ SAA allocation for each asset class (or +/- the neutral SAA % if it is less than 10%). This will allow us to tilt the portfolio at different points in the market cycle to be underweight or overweight growth/defensive assets depending on our view of where we are in the market cycle.


5. The composite benchmarks for the Diversified Funds will now be the same as the Appropriate Market Index (AMI)
All the asset class benchmarks that contribute to the composite benchmark for the Diversified Funds will be market indices reflecting the characteristics of that asset class. Previously there were some absolute return or ‘cash-plus’ components for the Diversified Funds benchmarks and a separate AMI. Going forward the benchmark will be the AMI. This does not change the underlying approach for any asset class, but it will make it easier for clients to assess our active performance. For the Balanced and Growth funds, proceeds from the reduction to Alternatives have been reallocated across the Income and Growth allocations in accordance with our forward-looking views described below.

Rationale


Our central view is that long term interest rates have likely peaked, and that the next move for most major central banks will be to 
move short term interest rates lower. We believe the amount of duration we have in the Diversified Funds, most explicitly via the 
fixed income funds, means they will be well positioned to benefit if this plays out. We are however cognisant that the final move lower in inflation back to within the central bank ‘target bands’ could take longer than what was expected at the start of 2024 which all else equal would push back the timing of the cuts. The changes to the funds will be implemented by mid-September 2024

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