(May 1, 2012) — Australia’s superannuation fund allocations are dominated by a focus on fees and peer risk at the expense of diversification, active management, and returns, a new paper by Australia-based Round Tower Solutions asserts.
This focus has resulted in a move away from active management alongside a move toward cheaper to access asset classes such as equities. “There is limited diversification and too much focus on relative outcomes at most superannuation funds,” the paper concludes. “Asset allocations are mildly different at best. The potential value of diversification is being eschewed in favor of what seems like the lower risk strategy of generating returns explained by equity markets and the outcomes of other funds.”
Entitled “Where’s the Credit?”, Round Tower points to the low allocation schemes have made to dedicated credit strategies (in particular non-investment grade opportunities) as an example of the potential for improved diversification. It notes a number of favourable risk and return characteristics that various sectors of the credit markets offer as an alternative to equities.
The paper continues: “Improved risk and portfolio management techniques, more of a focus on individual members, and efforts to make the superannuation and financial planning systems more efficient are commendable and necessary. However, new ideas and change are often hijacked for other purposes, or create unintended consequences, and well-intentioned ideals can lead to poor investment outcomes.”
The paper outlines a number of key concerns, namely that:
1) Improved diversification and risk parity strategies can result in reduced portfolio risk through lowering equity exposure
2) Lifecycle investing can result in reduced portfolio risk, again through a focus on reducing equity risk from its present levels at an inopportune time
3) Reducing costs and fees can result in reduced portfolio risk as a result of less active management and potentially less exposure to private markets strategies
Furthermore, the paper concludes that the easy thing for investors to do is to lower risk in the face of recent difficult return outcomes and volatilities, while implementing strategies that reduce fees and increase perceived diversification. Yet, as Australia’s superannuation funds adopt new practices the implications of these changes can result in “less of a focus on investment objectives, resulting in sub-standard investment returns,” Round Tower warns.
The Australian central bank reduced its key interest rate half a percentage point Tuesday to 3.75%, the lowest level in two years, pointing to the influence of the eurozone crisis and the moderate pace of growth in China impacting the global economy.