It will be a while before we get hard data on actual asset allocations by all super funds at the end of June, but anecdotal evidence is mounting that the average allocation to cash will be way above those same funds’ strategic allocations.
Estimates range from 5-6 per cent to well above 10 per cent, even for the largest and most sophisticated funds. This would compare with the average strategic allocation, according to Chant West’s multi-manager survey, of 4 per cent.
That survey points out that industry and other not-for-profit fund performance figures for most periods to June 30 were comfortably above their master trust counterparts again. According to Chant West, this was primarily due to their allocations to alternatives including unlisted property, infrastructure and private equity.
Fees, manager selection and implementation efficiencies did not matter so much. Chant West reiterated a concern the firm has raised consistently in recent years about super funds allocating more than 20-30 per cent to illiquid assets. The firm points out, as does the cover story in this issue of Investment & Technology, that US endowment funds which have had great success due to higher allocations to alternatives are fundamentally different to super funds.
They never have to repay the monies gifted to them, for instance. If the estimates that super funds have let their cash allocations mount up to 10 per cent or more are true, then liquidity is not a problem right now. In fact, the problem may be the reverse.
The problem is, of course, that they may miss out on a significant market bounce. The share market can move 5 per cent or more in a day, in an afternoon even – 10 or more per cent in a week.
So, what should funds do? This is where it gets complicated. They shouldn’t ignore the current market volatility and simply rebalance to their strategic allocations. The current economic and financial problems around the world which have caused the volatility are not going to go away anytime soon.
But funds need to have a new strategy which reflects the current climate. Trustees need to ask themselves again how much volatility they are prepared to wear. They need to redo the numbers on the relative risk premia attached to shares and bonds versus cash and need to get advice from as many sources as possible on valuations.
All that is difficult enough, but what they also need to do is examine more efficient ways to protect their portfolios through strategies which will provide reasonable liquidity with better returns. Better cash management is essential. The major custodians usually earn a good return from handling cash and foreign exchange requirements from their custody clients.