Declining rates may justify allocation shift
Falling interest rates could force Australian super funds to boost allocations to alternative assets to enhance investment returns, according to Simone Bouch, head of business for Standard Life Investments in Australia.
Indeed, on the back of last week’s official interest rate drop to 3 per cent, Bouch said that many investors were already starting to reassess.
“Despite falling interest rates, many superannuation funds have been allocating more to cash investments through 2012, aiming to avoid risk and volatility,” she said.
“The latest cut in interest rates could however cause many investors to re-think that stance.”
Pointing to predictions of further rate cuts next year, Bouch added that absolute-return funds would be well placed to offer investors positive returns well above the safer staple of cash.
“With expectations of more cuts in official interest rates next year, and ongoing volatility expected in equity markets, greater allocations to alternative assets such as absolute-return funds could benefit superannuation funds, potentially delivering greater investment returns, as well as adding to the diversification of their portfolios,” she explained.
“Absolute-return funds are well placed to offer investors positive returns well above cash investments with less volatility than share investments.”
According to Bouch, a higher than normal correlation between markets also meant that traditional asset allocation shifts between equity and bond markets would not necessarily provide investors with the answers they were looking for.
“Nor will cash provide the returns investors need going forwards,” she said.
“An absolute return strategy combined with more sophisticated risk modelling can add to superannuation investment returns in a way that is palatable to investors and helps them to build their wealth over time.”
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