The weight of money in the markets generally as well as structural changes in the way super funds are approaching their asset allocation are combining to ring warning bells, the first of the Fund Executives Association Ltd June briefings was told yesterday.

There are several risks associated with the new-style asset allocation, which involves increasing international and emerging markets exposure coupled with new investment classes, of which investors need to be wary. According to Al Clark, the head of multi-strategy investing at BT Financial Group, the illiquid nature of some types of alternatives portfolios are yet to be tested in a crisis. He told the FEAL briefing in Perth that the famous Yale endowment fund portfolio, which has been adopted as a poster child for modern institutional investing, has about 35 per cent of its investments in assets considered illiquid. Clark asked whether there was a sufficient premium being paid for this illiquidity. He suggested that there was a lack of transparency in alternative assets and an opaque view of the portfolio level of risk. “What risks are really in the portfolio and do I have the systems to identify them?” he asked. He also said that increasing allocations to developing economies tended to assume structural change. However, running large budget surpluses was not a guarantee of political stability. For example, Venezuela’s nationalisation of assets, Thailand’s impending change of monarch and China’s history of unpredictability should be considered. “The level of regulation in unlisted, alternative assets is generally low,” he said. As super funds increasingly sought to separate alpha from beta, they should recognise that the persistence of returns in alpha was not guaranteed. Clark questioned whether there were enough non-economic participants to skew excess returns, on average, in experienced investors’ favour – as is the considered norm, say, in currencies because of the governments and exporters/importers who operate in the market with different aims to that of the professional investor. Clark said that the general appreciation of asset prices had led to a distortion in correlations and suppressed volatility. He said that the optimal portfolio for a theoretical investor would not necessarily match the requirements of the typical Australian super fund. The next FEAL June briefing is being held in Adelaide today and Melbourne tomorrow. The Brisbane and Sydney briefings are being held next week.

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