In its recent Strategic Asset Allocation Review, Lonsec made downward revisions to long-term expected returns across most asset classes, including a reduction in the expected performance of Australian equities. This led to a shift in Lonsec’s strategic asset allocation weights for its traditional balanced risk profile, with the majority of the recommended equity allocation now tilted towards global shares.
“The main drivers of this decision were the reduced risk and return benefit offered by domestic shares relative to global shares, as well as the diversification benefits achievable through a global allocation,” said Lukasz de Pourbaix, Chief Investment Officer at Lonsec Investment Solutions.
“We believe that, given the current outlook, a higher global allocation is appropriate. Australian equities represent only a very small part of the global equity market capitalisation and are predominately concentrated in the financials, energy and materials sectors. So it is important that investors look abroad to maximise the benefits from diversification and achieve a smoother return outcome over the long term.”
Across Lonsec’s non-traditional risk profiles, which include alternative assets, increases were made in global fixed interest and diversified income weights across the defensive and conservative risk profiles, funded by reductions in conservative alternative assets.
“This change was implemented to further strengthen the defensive characteristics of the portfolios while matching the needs of the end investor,” said de Pourbaix. “The main benefit of alternative assets is they tend to have a lower correlation with traditional asset classes. But investors need to ensure that they are using the right alternative strategies for their investment objectives. Given the current outlook, we felt a slightly lower allocation to conservative alternative assets was appropriate for the defensive and conservative risk profiles.”
Changes to Lonsec’s Strategic Asset Allocation weights
For Lonsec’s traditional risk profiles (which exclude alternative assets), the shift towards global equities was implemented across the balanced, growth and high growth profiles. For Lonsec’s non-traditional risk profiles (which include alternative assets), the shift towards global equities was implemented across the growth and high-growth profiles, and the shift from conservative alternatives to global and diversified fixed income was implemented across the defensive and conservative risk profiles (see tables below).
