Reading the recent rate path: what changes for asset allocation
A documented framework for revisiting duration, equity exposure, and alternatives when the policy rate path shifts.
When the policy rate path changes, the temptation is to act quickly. The discipline is to act deliberately. This note sets out the framework we use to translate rate decisions into portfolio changes, and the assumptions behind each step.
The framework
We separate the question into three parts: duration in the fixed income sleeve, equity beta in the total portfolio, and the role of alternatives.
Duration. A higher terminal rate raises the expected return of high-quality bonds. We model the trade-off using the yield-to-maturity minus our inflation assumption, and compare against the equity risk premium. When the real yield on 7 to 10 year government bonds exceeds 2%, we lengthen duration toward the top of the policy band.
Equity beta. Equity exposure is set against the risk profile, not the rate cycle. We do not move clients between profiles in response to rate decisions. What we do is stress-test each profile against a rate path scenario, and document the result in the investment policy statement.
Alternatives. Private credit and real assets have different sensitivities to the rate path than public markets. We size allocations against the funding cost and the liquidity profile, not the headline yield.
What changes in practice
For most clients in the Balanced and Growth profiles, the practical change over the past year has been in the fixed income sleeve: shortening duration in 2023, then lengthening selectively in 2024 as real yields rose. Equity allocations have not moved between profiles.
What does not change
The investment policy statement, the rebalancing bands, and the review cadence. These exist precisely so that short-term decisions are made against a documented long-term framework.
For information only. Not investment advice. Past performance is not a reliable guide to future returns.