It is also important to look more widely at the sources of return. The economic drivers of equity returns also influence the credit component of corporate bond returns. The relationship is not linear. It is also not independent. In contrast, the drivers of returns from real estate and commodities, for example, are related but do not necessarily operate in the same direction and so offer greater protection. These factors are most likely to impact our portfolios at the very time when we need diversification the most. two: strategic or tactical? The high levels of volatility in the market may make it tempting for superannuation fund investment committees to feel like they need to do something. We would argue that in all market conditions there is much greater merit in focusing on the long-term broad asset allocation – the strategic allocation rather than attempting to rebalance the portfolio to capitalise on short- to medium-term opportunities or avoid short-term uncertainty, which is the tactical approach. There are two reasons why it is important to follow strategic objectives rather than trying to make significant changes now.

First, while it is difficult to predict the direction in which markets will move on a day-to-day basis, it is easier to predict levels of volatility. Large market movements on one day are likely to be followed by further large market movements in subsequent days. These are volatility clusters. Figure 2, which shows the daily price change in the MSCI World, illustrates this point. The clusters of volatility can clearly be seen. More importantly, so can the recent large increase in volatility at the far right-hand side of the chart. This means that there is greater entry point volatility at the moment. This is volatility around the price at which you trade. A large change in asset allocation at this point could turn out to be the best decision that your investment committee ever makes. It could just as easily prove to be the most costly. The second reason not to make dramatic changes now is that a longterm investment strategy gets a pension fund from where it is to where it wants to be. It should therefore not be torn up in times of market volatility. This is not to say that a strategic allocation should be immune to significant market events.

But amendments should be changes to the long-term strategy, not just tactical changes to the current allocation. Three: advantageous risk? Given the current volatile markets and the lack of return in traditional asset classes, superannuation funds have strong incentives to look for other sources of return. In particular, sources that are more stable than and less correlated to equities and with the potential to yield higher returns. A better understanding of the risks involved in investing can create opportunities. If we look further than reward for taking market risk, other sources of return are possible. For example, many asset classes offer a reward for giving up liquidity. If you invest in an asset that can take time and money to liquidate, then the cost of the asset will often be lower to compensate for this fact. Superannuation schemes have very long-term investment horizons. As a result, they are able to take advantage of the illiquidity premium offered by alternative asset classes such as infrastructure, real estate and private equity.