Australian superannuation should move away from outmoded strategic-asset allocation models and embrace dynamic asset-allocation and setting absolute-return objectives, attendees at a major investment conference in Sydney heard last week.
While the panel of experts at Morningstar’s Investment Conference last week may have differed on their views on various asset classes, they were unanimous in their criticism of the current strategic asset allocation approach that dominates the industry.
The panel consisted of Schroders’ head of fixed income and multi-asset, Simon Doyle, investment strategist at MLC Investment Management, Michael Karagianis, and managing director and chief investment officer for Ibbotson Asia, Daniel Needham.
Doyle says that current strategic asset allocation approaches for a typical balanced fund do not give enough flexibility to manage risk and protect against market downturns.
He noted that while funds may have stated real-returns objectives, this was often not reflected in the end construction of portfolios.
“There are ways we can do things better and come up with much more satisfactory outcomes for clients,” Doyle says.
“A lot of the reasons why people are putting money into term deposits is because the model we have used is not delivering what they want. But there are models out there.”
Needham cited career and peer risk as a reason for the herding of balanced funds into typical 70/30 equity-bond portfolios, which may ignore the current market conditions and underlying risk of those asset classes.
He called for a risk-based approach to asset allocation, which entails extensive scenario testing to ensure portfolios perform well in a range of different market conditions and protected capital during major market events.
“As we approach the ageing population and the baby boomers start to draw more income, I think there are going to be some real challenges to this traditional approach and I think this industry fund idea of using your 70/30 fund through your retirement is fraught with peril,” he says.
Karagianis told delegates that the industry needed to assess absolute-return funds differently, saying that analysis and classification of these funds was being lumped in with hedge funds.
He also called for the industry to adopt asset-allocation approaches that meet investors demands: even, stable returns over time.
“Investors don’t want to maximise returns, they want to get a more even stream of returns over a period of time that exposes them less to some of the downside shocks that they have actually experienced over the last few years,” he says.