The trend away from traditional profiles in portfolio construction like the benchmark 60/40 asset mix may have accelerated due to the events of 2020 according to State Super’s Kerrie Pratt, but the development is hardly a surprise.

The government-regulated fund’s head of strategic partnerships says the 60/40 benchmark “isn’t something super funds have focussed on for a number of years”, especially in Australia.

“It’s widely used overseas but super funds here have been much earlier adopters in all areas including asset classes,” Pratt tells Investment Magazine ahead of a session she will speak on at the Conexus Financial Fiduciary Investors Symposium on November 12.

Attributing the trend to the pandemic or a low-rate environment alone would be simplistic and ultimately reductive, she believes. Australia’s institutional fiduciaries and trustees have been developing and implementing alternative solutions since long before these developments occurred.

“60/40 has done a great job and for an individual investor it used to offer an effective opportunity for diversification with upside protections and capital growth, plus downside protection for bonds and those things are important to investors,” Pratt says.

Moving away from the benchmark has happened incrementally, and involved several factors, she says.

“I don’t think Covid-19 or the current low rate environment have driven that, it’s really just a natural evolution over time. Larger pools of capital have allowed us to increase specialisation into fruitful areas of returns.”

On top of her role with State Super, Pratt was appointed as a non-executive director at the $2 billion GuildSuper fund, which has 86 per cent female membership, in April.

While the institutions have been searching for more nuanced solutions to portfolio construction, Pratt says, 2020 has brought with it a “coincidence of the impacts”. The pandemic and the economic flow-on effects, alongside the support efforts by central banks, are “synchronised more than they’ve ever been in any period I can think of,” she adds.

A spanner in the works for domestic fiduciaries and fund trustees, she explains, will be the ‘Your Super, Your Future’ reforms announced as part of the recent federal budget, which Pratt says will put super funds in a “rapid race to the same point” due to overemphasis on simple reference portfolios.

Pratt’s concern is that there is a disconnect between the proposed legislation, which look set to penalise funds for not meeting liquidity and performance goals, and the long-term goals of fund members.

“There is a lot of discussion yet to come from APRA and we all hope we end up in a sensible place but it makes it hard to see how member outcomes can be successfully pursued when trustees have to think about meeting liquidity requirements if an arbitrary decision is made about their performance at a particular point in time and they’re no longer able to receive contributions from new members,” she argues.

Inhibiting the use of illiquids and other alternatives investments is a policy that needs to be considered carefully, she says, especially in the ‘lower-for-longer’ rate era where 40 per cent of the traditional benchmark portfolio is allocated to a near-zero return sleeve.

“Investing in large amounts for cash used to be acceptable for long periods of time,” she says. “That was when cash earnt something, but today it’s a drag on portfolios and there’s little reason to use cash unless you want to keep some dry powder. But views range on that one.”

For retail investors and fund members who want to wrest control of their retirement savings in light of the proposed changes to super and decreasing reliance on the 60/40 benchmark, Pratt says the opportunities need to be balanced with some downside risk mitigation.

“There are strategies these days and they’re not out of the reach even of smaller investors,” she explains. “It’s worth looking at downside protection via risk overlays or structured products offering an asymmetric payoff that provides upside participation, but with more downside protection. You get a floor on your losses, and it’s a much more nuanced approach than good old 60/40.”

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