Reduce Aust equities weighting for greater returns
Moving away from Australian equities and towards a diversified growth strategy could increase returns and reduce volatility with research showing the average superannuation fund can no longer rely on domestic market returns .
The research, released by Investec Asset Management in a white paper titled Diversified growth strategies and their role in Australian superannuation funds, found that a 15 per cent allocation to a diversified growth strategy provided the greatest risk-return benefits, particularly when substituting within the portfolio's Australian equities allocation rather than international equities.
Investec Asset Management - Diversified Growth Fund (Australian), Co-Head of Multi Asset and Portfolio Manager, Michael Spinks said the dependence on domestic assets alone was not enough to meet the performance objectives of super funds.
He said the opportunity set, investment flexibility and active currency management of diversified growth strategies was appealing in the face of returns from Australian assets alone.
According to Spinks the typical super portfolio invested around 40 to 50 per cent of funds in domestic Australian assets and while they have exceeded performance objectives over the long run the risks have been high.
"Over the time period 1900-2014, although Australian equities exceeded their typical performance objective — for instance, a return of inflation plus 5% p.a. - it was achieved with a high volatility, indicating a significant variability of return."
"Australian bonds and cash, on the other hand, significantly underperformed the objective, demonstrating they have not been effective in generating the required return."
He said diversified growth strategies, which tap into multi-asset investments, first began to be used with UK defined benefit funds they had been adopted more widely including by Australian defined contribution funds.
"Investors have recognised the role that diversified growth strategies can play in helping to meet their respective objectives, with the market now attracting around $230 billion of funds globally," he said.
"We believe diversified growth strategies should be well placed to meet real growth return objectives for Australian institutional investors, while providing investors with increased certainty that their desired outcome will be achieved."
AUTHOR
Jason Spits
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