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Domestic science

The Cautious Adviser Fund Index is the most diversified of the three AFIs with a broad exposure to all major asset classes. It has reacted less acutely to recent global stockmarket volatility than the Aggressive and Balanced AFIs.

While equities are still the panellists’ favoured asset class in the Cautious index, with an overall allocation of 47 per cent to equities at May 1, 2006, weightings to fixed interest (39 per cent), property (9 per cent) and cash (5 per cent) are all greater in the Cautious AFI than across the other two indices.

With a 91 per cent allocation to equities, the Aggressive AFI is considerably more exposed to equity market fortunes and has predictably exhibited higher levels of volatility than the Balanced and Cautious indices.

While the Cautious index is more diversified by asset class, its equity exposure is more concentrated in UK shares. Overseas equities make up just 26 per cent of the total exposure to shares in the Cautious AFI while the corresponding figures for the Aggressive and Balanced indices are much higher, standing at 51 per cent and 38 per cent respectively.

This implies that, in aggregate, the panellists view overseas equities as more risky than shares in domestic companies, despite the diversification benefits that a broader regional exposure can bring.

Thinc Destini director of investments Ian Shipway says: “There is an impression that overseas markets are more risky and it is better to stay at home but the FTSE 100 index has a significant amount of international exposure and investors are perhaps not getting as much exposure to the UK economy as they think. Overseas equities also have currency risk.

“There is a psychological side, too. People feel comfortable investing in domestic companies. The UK market also has a tradition of paying higher dividends and investors get a decent part of their total return through an income stream. Higher dividend yields can dampen out volatility.”

Weightings to the IMA UK equity income sector are also greater in the Cautious AFI, with approximately 57 per cent of its UK equity exposure invested in the sector.

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