Reading the asset allocation landscape

Superannuation trustees have rarely faced more complexity when it comes to asset allocation. A Super Review roundtable examined the key factors, this is part one.

Mike Taylor, managing editor, Super Review: So welcome to the Super Review Janus roundtable where the subject is fixed income from a global perspective. And just going back over it, it's certainly been the case that global investments proved to be a key to Australian superannuation fund returns last financial year. But do we believe this will continue to be the case over the next 12 months? Justine?

Justine O'Connell, consultant, Frontier Investment Advisers: From our perspective, looking forward, we're still positive on equities. We have a positive tilt across Australian, global and emerging markets. We've actually now revised that with a slight tilt towards Australian equities versus global equities, just on a valuation basis. Also, from a business confidence perspective, we're relatively slightly more positive on Australian equities versus global, but that's not a meaningful allocation by any extent.

In terms of other asset classes, we remain negative and underweight in terms of sovereign bonds, so both global and Australian in terms of the return outlook for those assets classes. And from, I guess, an unlisted asset perspective, we're still relatively positive on unlisted property and infrastructure, and slightly less positive on a domestic perspective, and negative on the listed counterparts of those two asset classes. [We are] generally neutral on credit with a slight positive tilt towards a floating rate, global exposure, mainly bank loans does differ a little bit.

In terms of outlook, we see that global exposure still can provide a pretty positive outlook. We're not expecting the same sort of return obviously that we've experienced over the past 12 months from global equities in particular.

Stephen van Eyk, investment consultant: Yes, I think generally we like international because Australia's national income is dropping. There's been globally macroeconomic disappointment virtually continually for the last 18 months. If you compare macroeconomic forecasts to what actually happened, it's just been month after month of not meeting forecasts. So that can't be good for Australian investments. And I think the Australian dollar will certainly fall more as a result of that.

In terms of global investments, it's interesting because it seems like the lower you get growth, the more positive markets have been up to this point and that's created a situation where you've got some overvalued investment markets and some disappointing returns. In fact earnings have been really disappointing in equities as well, global equities.

So that leaves us with a situation where, what's worse? And I think from my perspective, in that sense I think Australian investments are in a bit of trouble. In terms of specifically fixed interest, the main problem you've got there obviously is that you've got disappointing macroeconomic results which you'd naturally think, well fixed interest can go on a bit longer. But at the same time, and this is what I wonder about, the positive returns from markets when growth isn't that strong, you get to a point where a lot of the issuers may not be going that well and so, if you're trying to heighten your returns by using corporate debt and some sovereigns and everything else, that could actually be downgraded at some point in the future.

In the short-term, I think it'll go on the way it has been - a lot of volatility because of the markets being slightly overvalued, you get disappointing results, there's a lot of volatility. But it'll probably go on this way for a little bit longer anyway until you get clear on where the economy's actually going. I think in the medium term, I think some of the dangers are not coming from where people actually think they are, but I'll talk about that later.

Greg Michel, senior consultant, JANA: I continue to support diversifying your assets beyond Australia and into a global investment opportunity set. When you look across the globe you seeing at the moment a significant amount of de-synchronised economic growth and as a result de-synchronised monetary policy across the major central banks. The US is clearly further down the recovery path than Europe is at the moment and this creates relative investment opportunities in particular markets. Closer to home, Australia is also undergoing an adjustment process in the aftermath of the commodities boom and subsequent correction. The economy is attempting to adjust and reduce the relative importance of the mining sector which is proving to be a painful process especially for the AUD and while growth remains positive, the unemployment rate has been on the increase.

So diversifying beyond just Australia to include global markets provides greater investment opportunities.

If you look at the fixed income asset class, it is an interesting place to be at the moment. We are cautious about having too much interest rate duration at the moment, given the current historic low yields and the improving economic outlook in the US. So I tend to agree with what you're saying about sovereign bonds. Sovereign bonds do look expensive on most measures at the moment.

I do see opportunities however in other parts of the bond market. There is still a reasonable amount of yield premium attached to High Yield corporate bonds. But you need to be careful in this sector as the energy sector does represent a significant component of the High Yield market so taking an active management approach is more relevant than ever here. I also see opportunities in the secured loans market, which is an asset that typically does not have a lot of interest rate sensitivity, which is a plus given the current low level of yields.

Beyond that, just the sheer size of the investor base in Australia demands that you go global to look for opportunities. Given the diversity of growth that we're seeing at the moment, that just make the global diversification even more compelling.

Chris Diaz, head of global rates and portfolio manager, Janus Capital: I would agree with a lot of Greg's comments, certainly with interest rates globally at exceptionally low levels. I think the likelihood of a further move down in rates causing price appreciation is probably pretty low. So I think we probably need to at least in fixed interest recalibrate, return expectations to low single digits, maybe two to four per cent types or returns globally. And then certainly there is this central bank differentiation story that's going on.

I think that it warrants caution probably in all asset markets as this exceptionally easy monetary policy that has been going on globally is likely to come to an end in the latter half of this year when the US Fed begins to raise rates. I don't know if we fully know what to expect as we exit and start to raise rates. So I think that could at least add volatility to riskier asset classes, whether it be equities, high yield, credit or other. So I think that the environment warrants caution and warrants maybe a recalibration of what return expectations should be for all asset classes over the next 12 months.




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