Strategic asset allocation updates to our Governed Range portfolios
We’ve recently updated the strategic asset allocations of our Governed Range portfolios – the Governed Portfolios and the Governed Retirement Income Portfolios. Trevor Greetham, head of Royal London Asset Management’s Multi Asset team which manages the portfolios explains the four strategic changes.
Why we’ve updated the Governed Range portfolios
In our view, there’s no such thing as passive in multi asset. We take an active and broad approach to diversification, looking to improve risk-adjusted returns as far as possible. As part of this, we assess the portfolios’ strategic mix every year and make changes when needed to reflect shifts in the valuation of assets, to improve resilience to emerging threats and/or to include new asset classes.
We also review tactical asset allocation positions daily, with a view to adding value as the investment backdrop evolves. And we actively manage individual asset classes with the intention of adding further value and/or to improve the portfolios’ environmental, social and governance (ESG) credentials.
We believe that the choice of assets to include in multi asset portfolios should always be an open question. We include physical property, alongside equities, as an alternative real growth driver, and commodities to hedge against unexpected inflation shocks.
Within the fixed income part of the portfolios, we’re willing to keep bond duration exposure to a minimum when we feel yields are unsustainably low. Within equities, we tilt exposure away from the expensive US market towards the UK, where valuations are reasonable and resilience to inflation has proved better.
Strategic change 1: reducing US equity exposure on valuation grounds
In recent years, we’ve been gradually reducing UK equities in favour of global equities (predominantly the US) to increase the exposure to sectors with higher growth potential. These decisions have been borne out with the artificial intelligence boom in full swing.
This year, we took a small step in the opposite direction. US equities have bounced back from the initial tariff shock and are trading around 36 times the cycle-adjusted earnings, the sort of levels we saw just before the 2022 bear market. Valuation is a poor short-term metric for timing markets, but on a five-to-10-year view, high valuations are a major headwind. In addition, the US market has a heavy concentration to a small number of tech stocks which have a common theme, and this raises the risk of valuations reverting to the mean.
Country-specific and US dollar risk has also risen significantly under the second Trump presidency, with questions around the rule of law and unexpected government interventions at the company level. With these factors in mind, we trimmed global equities a touch, moving the money back into the more reasonably priced UK market.
Stocks historically offer the best long-term returns, but US equities have a valuation headwind
Cyclically adjusted price-to-earnings ratios
Prospective 10-year annual return vs US cyclically adjusted price-to-earnings ratio
Source: Bloomberg, LSEG Datastream and Royal London Asset Management, as at June 2025. Cyclically adjusted price-to-earnings data (Shiller PE) from December 1981 to July 2025.
Strategic change 2: adding to bond duration on higher yields
Academic theory says that government bonds offer investors a risk-free return. However, before 2022, we thought bonds were offering ‘return-free risk’. Yields on 10-year gilts closed at an all-time low of 0.04% in August 2020, with real yields below -2%. This meant that we were, in effect, paying to lend the UK government money. Any sensible path back to an equilibrium level of interest rates was likely to result in capital losses and, as a result, our strategic exposure to government bonds was low.
The trigger for mean reversion came in the “spikeflation” shock which followed. An inflationary post-Covid recovery coincided with higher energy prices as Russia invaded Ukraine. Global government bond prices fell and yields spiked as central banks scrambled to hike rates. Gilts suffered further downward impetus in the short-lived Liz Truss premiership.
When the dust settled in mid-2023, 10-year gilt yields were 4.5%, close to where we’d expect them to be in the long run. Real yields had also swung into positive territory – with these currently trading around +2% – meaning the government is paying us.
Government bonds are now one of the few asset classes we see offering good value and we’ve taken this into account in the changes to the Governed Range portfolios’ strategic asset allocations, first in 2023 and again in summer 2025. We did this by adding to duration, with index linked gilts included as an inflation hedge.
Strategic change 3: diversifying bond exposure on tight high yield spreads
The multi asset Governed Range portfolios use a wide variety of fixed income strategies across the credit spectrum, from government bonds through investment-grade corporates and out to global high yield. After years of strong returns, the interest rate premium offered by US high yield bonds over the US government has fallen to a record low level. We responded to this by trimming global high yield exposure in favour of a new allocation to asset-backed securities.
Asset-backed securities continue to offer attractive yield premiums over investment-grade bonds with relatively low duration and strong structural protections; bond holders have recourse to the underlying assets if interest payments are missed. A modest addition to the mix improves diversification while maintaining a disciplined active approach to credit risk.
Government bonds are no longer “return-free risk” – but bond spreads are tight
UK index linked gilt yields
US high yield spread over Treasuries
Source: LSEG Datastream, as at 21 August 2025.
Strategic change 4: changing property exposure
UK commercial property is an important diversifier within Governed Portfolios with growth-seeking and inflation-hedging attributes. Exposure is to a wide range of economic sectors with properties spread across the UK, including offices in prime locations, distribution centres, retail parks, and the healthcare and living sectors. The asset class has a direct link to the cost of living, with assets valued against UK rental income.
Property total returns kept pace with equities between 1987 and 2022, only to suffer a sharp drop in the 2022 mini-Budget crisis. The market has since recovered steadily and property continues to offer good valuations.
We’ve made some propositional changes within the Governed Portfolio range to give a more graded exposure to property across the risk spectrum, increasing the weighting in the medium-risk Governed Portfolio Moderate and Governed Portfolio Growth. We've done this while reducing exposure to property in the higher-risk Governed Portfolio Dynamic to bring it closer to the new Governed Portfolio Total Equity, which sits at the top of the range.
Property continues to offer decent valuations as the market is recovering
Property – a real growth asset like equities
Property yield vs gilts and UK base rates
Source: LSEG Datastream, as at 21 August 2025.
Broader diversification brings greater resilience and a focus on risk-adjusted returns
As ever, we build on the strategic asset allocation as the starting point, then implement our shorter-term tactical views. We’re currently modestly overweight in equities, including an overweight in the US and in technology-related sectors which, for the time being, counters the strategic change away from US equities.
Governed Portfolio Growth strategic mix – aiming for better risk-adjusted returns through a greater allocation to real assets and inflation hedges
Source: Royal London, strategic asset allocation breakdown as at 17 July 2025 and equity split breakdown as at 30 June 2025. Please note that figures may not add up to 100% due to rounding.
Find out more
To see the strategic asset allocation changes for each of the Governed Range portfolios, visit the fund changes section of the website.
