Investors
P: 1800 658 404
View full details
Financial advisers
Contact your state account manager or our client services.
View full details
Shopping Centres
For leasing, casual leasing and brand solutions enquiries
Contact Us
Connect with us to stay up to date with news and updates.

LinkedIn

The case for dynamic asset allocation in a low-return world: part 1


The financial crisis of 2007/2008 focused attention on traditional approaches to asset allocation and portfolio construction.

 

In particular, it highlighted the potential for alternatives in the strategic allocation approach (SAA), the asset allocation strategy adopted by many traditional diversified funds. This is the first in a two-part article that explores this important topic.

Funds adopting an SAA approach maintain a relatively static asset mix throughout the market cycle irrespective of valuations. They are reliant on historical risk-return correlations, and they are heavily influenced by peer-group allocations. SAA approaches are tied to asset-class benchmarks, which are sometimes skewed. For example, Australia’s S&P/ASX 200 index is heavily weighted towards banks and resources companies.

While the SAA approach may be appropriate for investors with long time horizons, particularly those in the accumulation phase of their investment lives, it may not be beneficial to those in retirement or pre-retirement.

In addition, emotional factors such as greed and fear can drive markets to extremes. In a world where bubbles and busts occur, retirees may be better served by a strategy that is more flexible in the face of market swings, which often present shorter-term opportunities.

An alternative approach could give investment managers a mandate to achieve a specific return target, without making references to market benchmarks but allowing the flexibility to make meaningful asset allocation changes to achieve the investment target.

However, before exploring an alternative approach, it may be useful to note that SAA has performed well over recent years. Let’s consider the contributors to that performance and whether those contributors have changed.

Why have SAA index funds performed well over recent years?

Recently, we have had a period of generally strong returns from major asset classes from 2012 until early 2015 as markets recovered from distressed valuations. Economic growth and stronger US earnings underpinned this. Market shocks during this period, such as euro debt issues, were combatted by central bank asset purchase programs, known as quantitative easing (QE). In fact, over the last five years as central banks have pushed interest rates closer to zero, with some countries slipping into negative territory, we have experienced one of the largest bond rallies in history.

In summary, over the cyclical rally from 2012 to early 2015, the following factors acted as tailwinds for SAA index funds:

In the second part of this article, we look at how the current investment environment affects asset allocation and how dynamic asset allocation is becoming increasingly relevant as a result of this.

Taking your SMSF to the next level
Download now

Sign up to our newsletter!

Receive regular insights and marketing communications including a weekly update of trending news and market insights that are tailored for SMSF trustees and investors.
Sign me up
AMP's Australian operations are bound by the current Australian privacy legislation which outlines how organisations should manage and use personal information collected and held about their customers. AMP Privacy Policy

Thanks for subscribing

Thank you for subscribing to our weekly highlights newsletter.
Your privacy is important to AMP Capital and we are bound by the current Australian privacy legislation. View our privacy policy
Submit and close

Introducing Active ETFs

We've joined forces with BetaShares to launch the next generation of active exchange traded products.

With the same investment strategy, target investment portfolio and distribution frequency as the existing unlisted fund, Active ETFs deliver easy access to diversified global portfolios via a single trade on the ASX.

Learn more

Sign up to our newsletter!

Receive regular insights and marketing communications including a weekly update of tending news and market insights that are tailored for SMSF trustees and investors.
AMP's Australian operations are bound by the current Australian privacy legislation which outlines how organisations should manage and use personal information collected and held about their customers. AMP Privacy Policy
Sign me up