MLC’s Brian Parker argues that recent equity-market pain is a catalyst to change the whole asset-allocation conversation with clients.
Over the last few months, there has been a significant amount of discussion about how exposed default superannuation funds are to equities. Former Prime Minister Paul Keating and Future Fund chairman David Murray are among those who have weighed in to the debate. Australian funds typically do have higher allocations to shares than pension funds overseas, and conversely, a lower weighting to fixed income, but is this necessarily inappropriate?
Certainly, it would have been more comforting to have this conversation before world equity markets halved in value, and before Australian and global bond rates fell to record lows. If Australians are too heavily invested in equities, now is a less than ideal time to do anything about it.
As an industry, we have tended to encourage people to invest in equities – dare I say it, to put their faith in equities – as the best chance to grow long-term wealth. For default fund investors, super funds, presumably on the advice of their consulting actuaries, decided long ago to have a higher weighting in equities for members’ own good. If left to their own devices, members would probably have opted for a default that would be too conservative.
No guarantees for equities
However, there have never been, and there still aren’t any guarantees of success in equity investing. The return you get from any investment depends on what you pay for it, where you end up and the journey you take to get there. If I told a Japanese investor in 1989 or a US investor in early 2000 to put their faith in equities, they’d probably be very unimpressed with me right now. There have been some quite long periods where certain equity markets have not lived up to expectations.
It was this kind of thinking that led MLC to establish the Long-Term Absolute Return Portfolio in 2005. While LTAR has always had a substantial allocation to equities, it also has significant allocation to alternative investments, and much greater asset-allocation flexibility than a traditional ‘balanced’ fund, because it has never been subject to any peer constraints.
The other point this debate highlights is the importance of encouraging investors to take an interest in their superannuation from a much earlier age, and to make a deliberate, informed choice as to the kind of investment strategy that suits them. For fund managers, rather than a wholesale retreat out of equities and into fixed income (something about ‘horses having bolted’ springs to mind here), maybe we need to change the whole asset-allocation conversation.
As an industry, we have – by and large – built portfolios with relatively static asset allocations targeting an overall level of risk (read: volatility), and assumed returns automatically follow – at least over the long-term. These strategies are likely to deliver quite good returns over the next five to 10 years, if for no other reason than equity markets look reasonably valued today. However, there are still no guarantees. Surely we can do a better job of delivering more reliable returns, not by targeting risk, but by focusing on returns? In other words, building and actively managing diversified portfolios that maximise our clients’ chances of meeting their return objectives.
Brian Parker is an investment strategist at MLC
