Strategic asset allocation not designed for retirement products

Retirement products that use traditional strategic asset allocation will fail as it is not appropriate for shorter time horizons, according to Insight Investment.

Presenting online at the Conference of Major Superannuation Funds (CMSF), Insight Investment specialist, Adam Kibble, said strategic asset allocation key inputs were prone to significant errors over shorter periods.

While tactical asset allocation was critical to reduce risk, it was not appropriate for limiting downside risk, he said.

“Tactical asset allocation is designed to tilt allocation away from the neutral position and requires managers to get it right so it doesn’t eliminate risk, it just tilts risk,” Kibble said.

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“Reducing risk should be able to reduce uncertainty by narrowing the range of potential outcomes and this is achieved by managing downside risk.

“And strategic asset allocation doesn’t manage downside risk, it relies on time to recover performance.”

Kibble said often retirement products attempted to increase certainty by over-allocating towards defensive assets like term deposits and this generally led to lower overall returns.

He noted a better retirement strategy would be to set a return objective over a set period and maximise the chance of achieving that objective.

Kibble said this could be achieved by:

• Having a clear and appropriate investment objective for the specific time period;
• Not relying on forecasting return, risk, and correlation to achieve the objective;
• Understanding the investment building blocks available to achieve the objective;
• Managing downside risk to narrow the range of outcomes around the objective; and
• Strategy success or failure that was easily measured relative to the objective.