The $40 billion Victorian Funds Management Corporation has slashed its strategic asset allocation to Australian equities, and is trialling minimum variance portfolios to complement its growing use of fundamental indexing.

While the Victorian Government-owned funds manager has reduced its overall exposure to equities (including private equity) from 60 per cent to 56 per cent, the Australian equity component has been cut from 34 per cent at June 30, 2007 to a 23 per cent target today. That target is on track to be achieved by June 30 this year, VFMC’s chief executive, Syd Bone, said last week. Although outgoing chief investment officer Leo De Bever’s rationalisation program is well advanced, Bone said VFMC still had “;too many”; mandates on its books. To that end, VFMC’s search for “;better beta”;, spearheaded by quantitative director Laurence Irlicht, continues apace with Bone flagging an expansion of the internally-managed fundamental indexation program into global equities, and a trial of minimum-variance portfolios. Recently given a fillip by the introduction of an MSCI Barra index for managed volatility strategies, minimum variance portfolios are also being promoted to Australian investors by State Street Global Advisors. Weighted not by market capitalisation but by stocks’ historical levels of volatility, the director of research at SSgA’s global structured products research group, Eric Brandhorst, said minimum-variance portfolios were characterised by a 30 per cent reduction in volatility, a bias to small caps and value, and a bias against stock-specific risk.

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