The asset allocation techniques that most superannuation and pension funds use are out of date and they should be replaced by methods that match investment strategies with member return objectives, according to Michael Rice, Chief Executive Officer of RiceWarner.
In the current environment that probably means funds should reconsider their allocation to fixed income.
“We are in a very low interest environment, so you have to ask yourself: ‘Why does anybody invest in fixed interest, yielding 2 per cent, when your members’ objectives are CPI (consumer price index) plus 3 – 4 per cent?’
“All you do is weighing down your chance of returning that objective. But funds go underweight fixed interest instead of getting out of it.
“They will have to start marrying their investment strategies to member objectives and do that for the different member groups.
“But at the moment, we are still using the same asset allocation techniques that the actuaries developed in the 1960s and 70s. The world has changed: the market has and the objectives have,” he said.
You can invest in property, commodities and even gold if you are inclined to do so. The current limits on super fund portfolios are artificial and based on traditional ideas of asset classes.
Asked whether Rice advocated the use of unconstrained portfolios by super funds, he answered that we should think more about greater flexibility in using asset classes.
“What happened was that people started to invest in diversified portfolios which initially were made up of equities, bonds and cash, but then that expanded to include other asset classes.
“The naming is out of date and we should think more along the line of: ‘If we aim to achieve 7 to 8 per cent for our members, then what should the portfolio look like?’
“You can invest in property, commodities and even gold if you are inclined to do so. The current limits on super fund portfolios are artificial and based on traditional ideas of asset classes,” he said.
If funds don’t embrace a more objectives based investment strategy, then they leave themselves vulnerable to disruption, Rice said.
He pointed out that the Australian Securities Exchanges’ CHESS system already enabled self-managed super fund trustees to replicate model portfolios.
Just like Uber has done in the taxi industry, a new technological player could disrupt the institutional investment space even more.
“Investment will be the area of greatest disruption, because that is where the highest dollar amounts are,” he said.
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