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Fronting up on asset allocation

Friday, April 24th 2009, 11:55AM 4 Comments

by Philip Macalister

It may be naive of me to think this, but one day markets will recover and return to what we remember as normal. (As long as it happens before our memories go on us.) When that happens the whole KiwiSaver space will have a massive shake-up and the performance of managers will change significantly. I started thinking about this after seeing the latest performance numbers and saw that many which had done well have hidden behind cash. A smart move today, but when things change surely they will get left behind in the returns race. It would be useful to know what will be the catalysts for getting managers, particularly with growth mandates, to change their portfolios. The other bit I pondered was that it seems many younger, and arguably higher risk investors, are in low risk funds. How do we get advice to them and make sure what they invest in is appropriate for their investing horizon? I did see something recently which suggested that the rules should be changed so default options are more suitable to the client. Many managers now use a “lifestages” type approach where the asset allocation is automatically altered to reflect the investor’s time horizon. This is something which would be a positive enhancement to KiwiSaver. While lifestages is one option, I was also fascinated to see what NZ Funds is doing at the moment with its funds. In essence, it is taking a lot of the academic, jargon-filled bits out of investing and tailoring portfolios on a behavioural finance approach. In other words, they are approaching it on human terms. If you want to learn more about what I think is something very fascinating in asset allocation, then get your hands on a copy of the April issue of ASSET.
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Comments from our readers

On 28 April 2009 at 10:45 am Denis said:
I think a conservative default option is right for KiwiSaver and this approach has been vindicated by the volatility of all growth sectors since launch. After all, thousands of members have automatically enrolled and have done nothing else. Those that want alternative investment options are free to do so.

From 2010 many KS members may realise, for the first time, that their non-Govt KS funds can be used to help buy their first home. If a lifestages approach had been adopted, these members would be distressed to see negative returns and be unhappy.

I don't think exposure to volatile sectors is appropriate without the investor knowing exactly what they are doing, either with or without advice. In the meantime, the funds rest in a conservative berth until the provider is told otherwise by the investor.
On 28 April 2009 at 7:14 pm Peanut H said:
NZ fund managers basic asset allocation includes stocks, bonds, fixed interest, property and cash. What I find lacking from NZ fund managers is the skills to use derivatives to generate returns. I will now hear a chorus of excessive leverage and risky investments. Managed futures managers who apply strict risk control and trade with high quality counter parties on risk adverse exchanges have demonstrated futures can be less risky than the underlying investments NZ fund managers use. Other attractions of the futures markets is they are highly regulated, they use clearing houses which guarantee transactions (no counter party risk), highly liquid, transaction costs only a fraction of what other markets charge. So where are New Zealand's "turtle traders"? The answer is we can't afford them in NZ.

Commodity Trading Advises are investment companies which need multi-billion dollar assets under management to fund their technology and research teams. Which brings me to the point, NZ fund managers haven't got a hope, their only way forward is to allocate a higher proportion of funds to cash in the hope of reducing their likely losses and out performing their peers in the current market.

The major question which needs answering is, why don't NZ Advisers and investors insist on greater performance from the NZ funds management industry? a cynic might say it is probably due to what you don't know you don't miss.

It is also a sad indictment on our NZ funds management industry when the conservative default option is right for most KiwiSaver investors. The Morningstar KiwiSaver league tables show the best of breed default providers had a 1.91% return for year end 31/3/09. A disappointing result if you consider CPI is running at 3%. Just as well the employers 2% is making up for the loss to inflation.

The way forward for asset allocation. The herd will probably continue to follow the failed model, or adopt the nil sum capital guaranteed model of investing a dollar to get a dollar back in real terms in 5 to 10 years time. Those Advisers smart enough, will abandon the failed model and with some sound research will soon find the way forward.
On 30 April 2009 at 12:59 pm Majella said:
Peanut said:
"What I find lacking from NZ fund managers is the skills to use derivatives to generate returns"

Does Fidelity Life's Options Portfolio not, indeed, meet this desciption? True, it is alone in the space, and Fidelty Life is a small player, that would probably barely breach the horizon of the pointy-headed investment advisers.
On 1 May 2009 at 1:19 pm Peanut H said:
I don't know of any NZ fund manager who has a trading program which forms part of the Stark 300 Trader Index, which is compiled using the top 300 trading programs from Stark's database of Commodity Trading Advisers programs.

What I believe we need from a cone headed NZ Advisers perspective, is managed futures which can enhance the diversification of a portfolio and therefore play an important role in improving the risk and reward characteristics of that portfolio, whether traditional or alternative.

The question is, if we have a traditional portfolio of 30% equities and 70% bonds how can we guard against falling equity prices and rising interest rates?

We all due respect to Fergus's - Fidelity Life's Options Portfolio, using the Options Portfolio to protect a portfolio against rising bond interest rates would be as much use as putting a Morris Minors hubcap under your arm and pretending you are an AMG Mercedes.

If you are interested in joining the cone head Advisers sign up to the free research available from http://www.starkresearch.com/
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