Do we need to shake up the construction of portfolios?

Major shifts in the constructions of portfolios should not occur until a more permanent outlook on the global economy is gleaned, according to a superannuation chief investment officer.

Speaking at the Australian Superannuation Investment conference, held by the Australian Institute of Superannuation Trustees (AIST) in the Gold Coast, Mark Rider, LGIAsuper chief investment officer, said the challenge with constructing portfolios in recent times occurred five months ago when bond yields reached record low levels.

“The problem of how much protection [bonds] are going to give you will come down to that underlying level of inflation because once you get inflation up above 3%, historically, what you’ve found is that the bond/equity correlation has shifted,” he said

“So it's clear if you have a positive correlation and you get a bear market, bonds won’t fall as far.

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“But historically what we’ve seen particularly in the last 20 to 25 years is that it had that benefit of moving in different directions.

“It really is going to be critical going ahead about what that level of inflation is going to be.”

Rider pointed to the evolution of increased use of real assets in portfolios as a significant hedge to inflation over the last 30 years.

“There’s one thing in a higher inflation environment which is actually beneficial, in a diversification sense, is actually having those real assets.

“The nature to the linkage of their revenue to inflation, and the hedge that it provides.

“So I think we're sort of along there but what's going to be critical is going to be that level of inflation about whether ‘Yes, bond yields are up, are they going to provide protection? Do we need more alternatives? Currency?”

However, real assets may not escape the perils of a stagflationary environment, he said.

“Central banks, they're talking tough at the moment, [but] if they ease back and we do get a higher… entrench of inflation. That’s bad just in general for real returns.

“And in that environment, there’s necessarily nowhere to hide during that period.

“There's an issue of getting interest rates up aggressively and that’s what central banks are doing so hopefully it means that we’ll get inflation settling back to lower levels.”