An equities portfolio that truly maximises returns and minimises risk will have an allocation of only 34 per cent domestic equities and 66 per cent in global equities, according to Olivia Engel, head of active quantitative equity, Asia Pacific at State Street Global Advisors (SSgA).

Research carried out by SSgA to find the optimal Sharpe ratio allocation weighed the benefit of franking credits and a minimal cost of currency hedging for a high domestic equity weighting against the downsides of a higher volatility for the Australian dollar, lower return expectations (versus global equities) and a lack of sector diversification in domestic equities.

These filters were then applied against portfolios which had a bias to healthcare and IT, were neutral on energy, financials and utilities but disliked discretionary spend and materials.

The research also measured the worth of franking credits, by showing that without this uplift, a Sharpe ratio optimal portfolio of equities would only have 21 per cent in domestic equities.

Engel used this research to contrast the 53 per cent average domestic allocation in equities currently held by superannuation funds and the 3 per cent weighting Australia forms of the MSCI World Index Developed.

Engel said the figures raised questions about whether superannuation funds were investing to maximise returns or to invest with regard to peer risk.

“Do investors want to grow assets and not lose money or just outperform the market and not look too different to peers?” she said.

The research faced two challenges.

Greg Barnes, manager of listed shares at Sunsuper, pointed out a domestic bias was not unusual among international pension funds.

He cited figures for North American funds having a 75 per cent bias to domestic equities, European funds having a 60 per cent bias and Asian funds having a 75-80 per cent bias.

“Maybe investors are not looking to maximise returns and minimise risk,” he said, before revealing that of Sunsuper’s equities only 44 per cent is in domestic equities.

John Coombe, executive director at JANA, also highlighted the high leakage from overseas portfolios, in particular the withholding taxes on dividends, as well as the lack of access for some investors to sophisticated currency hedging processes.