Asset Class Diversification Asset allocation is one of the most important drivers of the returns for investors. Unfortunately, asset class returns vary from year to year and it is very difficult to identify which asset class will be the best performer. In light of the unpredictable nature of asset class returns, each of the funds maintains a strategic asset allocation. Each of the Portfolio and Solutions funds has a different split between equities and fixed interest, in order to meet the needs of investors with different risk and return requirements. Each fund is regularly rebalanced to ensure that its allocation to fixed interest and equity investments remains constant. Investors can therefore rest assured that the risk profile of their investments remains consistent with their needs and objectives. Why is asset allocation so important? The investment market is incredibly diverse, when viewed on a global scale. There are thousands of different listed equities from which to choose, and several hundred thousand fixed income securities*. Not surprisingly, then, the first step for most professional investors is to organise this universe of potential investments into something more manageable. This step has become known as "asset allocation". *Source Bloomberg The asset allocation decision spreads the portfolio across key asset classes and markets, in proportions that best meet the needs of that investor. This high level decision means that each component of the portfolio can then be dealt with separately. Organising investment strategy in this way gives investors control over one of the key factors that drives risk and return in their portfolios. Why is this? Research has shown that the performance of individual securities within an asset class is more correlated on average with other securities in the same asset class than with securities in other asset classes*. That is, the members of the groupings we term “asset classes” behave more like each other than like securities outside that asset class. Different UK equities will perform differently, but on average they will look more like each other than like US bonds, for instance. So by reducing the diversity of thousands of available securities into a handful of relatively homogenous groups, investors can make a small set of decisions on asset allocation and have a major impact on the structure of their portfolio. *Source: Russell Investments The Impact of Manager Style Professional investment managers use unique methodologies to decide which stocks to buy. These methods can generally be categorised into one of several broad investment styles, such as growth, value, market-oriented, and small capitalisation. Growth - These managers are primarily interested in a company's earnings. They focus on investing in companies they expect to exhibit profitability and shareholder earnings greater than their industry peers. Typical sectors are Media and Technology. Value - Value managers are most interested in getting a company's stock for a good price. They may purchase stocks of companies that are currently out of favor with the market, believing the stock is a good value for the price. Typical sectors are utilities and food and drink. Market-Oriented - These managers seek to develop well-diversified portfolios with average growth and valuation characteristics similar to the broad market. Many managers seek to add value by emphasising economic sectors they believe are undervalued. Small Capitalisation - These managers focus on smaller companies. Some of these companies are young and growing rapidly, while others are simply smaller businesses with long histories. These companies are characterised by low dividend yields and above-average volatility. Manager style is important because the differences in the returns to the different styles can be very large. The following chart, for example, shows the differences in returns to growth and value shares in the UK since 1991. Even the best value manager would have struggled to perform well relative to growth managers during the late 1990s, and even the most compelling of growth managers fared poorly during the bear market period. Blending Styles No matter which style is in favor at a time, Russell's blending of investment manager styles and complex style evaluation can help to manage risk and work toward more consistent returns. This is vital for performance consistency, and can help investors feel more comfortable adopting, and sticking to, a long-term investment strategy. The Importance of Style Russell Investments uses comprehensive research, complex algorithms, and sophisticated technology to regularly evaluate fund managers for style. Confirming style is important because it ensures that your investment remains appropriately diversified over time.

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