(November 21, 2011) — Australian superannuation funds are overwhelming exposed to equity risk at a time of volatility and low return. Yet risk-balanced investing approaches are not widely practiced, a fact vigorously debated and critiqued at the aiCIO Chief Investment Officer Summit in Sydney.
Panellists theorised that the massive, consistent tilt towards equity could be attributed to home bias toward Australian equities, the impact of choice of funds, in which individual members are free to move within fund options and between funds with little impediment and minimal costs and concomitant peer risk, in which superannuation fund trustees are reluctant to implement asset allocations drastically different from their peers for fear of underperformance and/or attracting unwanted attention from regulators.
Participants were candid in their assessment of the theory of risk-balanced structures and its applicability to Australia. Alastair Barker, investment manager at the AU$42 billion AustralianSuper, explained that the fund did not use risk parity approaches in its strategic asset allocation because of its high-conviction assumptions.
“I think the fundamental tenant of the risk parity thing for me is that you’ve got to have a belief that whatever it is you’re investing in, if you’re going to lever it, you’ve got to be pretty convinced that it’s going to return, and if you’re not absolutely convinced in the environment, than it’s really difficult to justify,” Barker said. “That’s just trying to put it into a common language that I can put to my investment committee.”
Barker noted that AustralianSuper had increased their investment focus on property and infrastructure, away from equities.
In noting that both Bridgewater and, latterly, AQR, have brought their risk-parity funds to the Australian market with some uptake, participants in a panel on active versus passive investment styles related the uptake to overall context of mostly stagnant asset allocation decisions through the broad reach of superannuation funds.
“Over the years, statistically, allocations have not changed by more than five percentage points at the margin in the past 20 years,” said Tony Day, CIO, Scarce Capital, and a former chief strategist, QIC and the Future Fund. “Show me one other service or structure that hasn’t changed since the Berlin Wall fell.”
But Tim Unger, head of investment strategy, Australia, Towers Watson, said that the returns environment of the past few years was leading superannuation funds to reconsider their risk management and to start looking at risk- balanced strategies as a possible solution. Damian Lillicrap, head of investment strategy, at the AU$32.4 billion Qsuper, said that the fund does pursue risk balanced strategies in its asset allocation.
“The risk parity direction is a direction that we see that we should be doing a lot more of,” he said. “We have stepped toward that in our fund under the last two years. We went away from the fixed interest benchmarks and starting investing in longer duration securities.”
The summit discussion is particularly relevant given superannuation funds’ broadly poor performance since the beginning of the financial year in July. Research firm Chant West released data Monday, November 21, stating that while the median growth superannuation fund – defined as a fund with 61-80% invested in growth assets – was up 3.1% in October, for the financial year to date, returns stand at -2.4%. Chant West noted that while median growth and conservative funds had outperformed “more often than not” over the long term, the recent period of underperformance that began in 2009 is “now the longest in the compulsory superannuation era.”