The average Australian superannuation fund could significantly increase its annual returns by shifting a proportion of its Australian equities allocations to a diversified growth strategy, according to a new research paper from Investec Asset Management.
The white paper, entitled Diversified growth strategies and their role in Australian superannuation funds, uses historical modelling to determine that by including a 15% allocation to a diversified growth strategy in a typical super portfolio, funds could increase their realised returns, lower their overall volatility and therefore improve their risk-adjusted returns. Notably, the strongest increase in returns came from substituting within the portfolio’s Australian equities allocation rather than international equities.
Michael Spinks, Co-Head of Multi Asset and Portfolio Manager for Investec Asset Management’s Diversified Growth Fund (Australian), said the results proved there were strong benefits to funds adopting a broader opportunity set beyond traditional domestic asset allocation.
“In our view, Australian superannuation funds cannot rely on domestic assets alone to meet their performance objectives,” said Mr Spinks. “The bread of opportunity set, investment flexibility and active approach to currency management of diversified growth strategies presents a particularly appealing option that funds should be considering as part of their allocations.”
Mr Spinks noted that while the typical super portfolio invested around 40-50% of its funds in domestic Australian assets, an analysis of the historical returns of these assets showed an investor could have achieved better returns by taking a more global approach.
“Over the time period 1900-2014, although Australian equities exceeded their typical performance objective – for instance, a return of inflation plus 5% p.a. – it was achieved with a high volatility, indicating a significant variability of return,” he said. “Australian bonds and cash, on the other hand, significantly underperformed the objective, demonstrating they have not been effective in generating the required return.”
While diversified growth strategies – multi-asset programmes that invest in a range of traditional and non-traditional return sources to seek a defined outcome – were originally designed for UK defined benefit funds, they were now being used by all types of global institutional investor, including the Australian style defined contribution funds, said Mr Spinks.
“Investors have recognised the role that diversified growth strategies can play in helping to meet their respective objectives, with the market now attracting around $230 billion of funds globally,” he said. “These strategies have attracted growing interest from a number of Australian super funds, which is of no surprise given the funds’ objectives are often aligned with those of diversified growth strategies.”
The roles that diversified growth strategies could play within a fund would depend on the nature of the investor, said Mr Spinks. “For instance, funds with high levels of governance may have less need for the strategy as a portfolio diversifier, but could benefit from idea sharing with the investment manager to facilitate more nimble management of the portfolio,” he said.
“Given the majority of diversified growth strategies are available to investors on a daily dealing basis, their potential as a liquid alternative solution also stands out.”
“We believe diversified growth strategies should be well placed to meet real growth return objectives for Australian institutional investors, while providing investors with increased certainty that their desired outcome will be achieved.”
Download the white paper Diversified growth strategies and their role in Australian superannuation funds.
Source: Investec
