Diversify beyond Australia for better super returns

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A new white paper suggests the average Australian super fund boost its returns with a more diversified growth strategy.

The white paper from Investec Asset Management says the average superannuation fund could see a significant increase in annual returns if it shifted a proportion of its Australian equities allocations to a diversified growth strategy. The paper uses historic modelling to determine that the inclusion of 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.

Michael Spinks, Co-Head of Multi Asset and Portfolio Manager for Investec Asset Management’s Diversified Growth Fund (Australian), said the paper demonstrated strong benefits to adopting an approach beyond traditional domestic asset allocation.

“In our view, Australian superannuation funds cannot rely on domestic assets alone to meet their performance objectives. 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,” Spinks said.

Spinks said the typical portfolio allocation invested around 40-50% of in domestic assets, but that historical returns showed the benefit of 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.”

Spinks said the role of diversified growth strategies within individual funds would depend on the nature of the investors.

“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.”