70/30 allocation still relevant despite defensive challenges

There is still a place for the 70/30 asset allocation in funds, according to AustralianSuper chief investment officer, Mark Delaney, but returns are going to be harder to come by in the future.

Speaking at the Australian Institute of Superannuation Trustees (AIST), he said AustralianSuper had seen returns of 20% which made it a “perfect year” for the fund.

However, he warned members to not expect to see that level of performance in every year and funds were likely to have to seek alternative routes for income.

The 70% growth/30% defensive strategy would be likely to remain in place but valuations would be harder to come by.

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“70/30 is a good portfolio, it takes out the volatility and gives good returns, it is a very good structure,” Delaney said.

“The question is about the defensive part and people are trying to diversify rather than relying on fixed income. But I don’t think 70/30 will change much.

“Given the low level of interest rates, returns will be harder to get, that is inevitable, not just in defensive assets but in growth ones as well.

“Equity valuations are high which is a good indicator that, over 10 years, returns will be harder to get so I expect people will use more currency and options.”

The conference had previously discussed the challenges of allocating defensively in a super fund and funds said they exploring other options such as ‘enhanced income’ in the face of low cash returns.

Meanwhile, he said AustralianSuper currently had 50% of its investments managed internally and expected this to increase to 75% in the future as it expanded. However, it would refrain from moving to 100% as there were certain asset classes which were better managed by specialists.