STRATEGIC ASSET ALLOCATION OR BUY AND HOLD – THE AUSTRALIAN DISEASE!
Strategic or static asset allocation (SAA) is the buy and hold investment process that gets delivered to most Australian retail investors, further a large portion of the industry would have you believe that it’s the only game in town. This simply isn’t true there are other ways and the genie is out of the bottle.
It shouldn’t escape the reader that this obsession with sticking to rigid asset allocations is a peculiarly Australian disease. Investment managers around the world have the jump on their Australian counterparts when it comes to being flexible to asset allocation and for good reason. Many investors set their return objectives based on a margin over inflation (CPI) however using the standard buy and hold approach, there is a high likelihood that investors will frequently not achieve their CPI-plus objectives over the prescribed three and five year periods.
The evidence supports this, in a recently published report by Schroders “Why Strategic Asset Allocation is Flawed” they highlight that based on a standard 60% growth 40% income diversified fund, an investor would need to invest for 53 years to achieve CPI +4% with a 90% probability.
An extraordinary statistic and one that many investment advisers simply choose to ignore, after all it’s often much easier to stick with the devil you know. However there are a growing number of enlightened advisers who understand the benefits of being more flexible in their approach to asset allocation. Relying on Old Father Time is often nothing more than a cop out as it avoids having to make decisions about the relative value of various asset classes.
The most common objection to dynamic or active asset allocation is the view that an investor is taking on a substantially greater level of investment risk by increasing the level of asset allocation flexibility. A viewpoint certainly but I would argue that adopting and sticking to the long term SAA can in fact be a very risky position as it ignores market conditions. If an asset class is expensive surely it makes sense to avoid it! A well-managed dynamic asset allocation process will I believe reduce total volatility for the client and deliver more consistent outcomes.
Most of this is common sense, in my role as an adviser I acknowledge as an absolute that Growth investors hate losing money just as much as Conservative investors do. If you accept this truism does it not follow that growth investors deserve to have their capital defended where possible? Conversely I haven’t come across too many Conservative investors who don’t enjoy making money, again does it not follow that when asset classes are cheap they might like to participate in that growth potential. SAA simply chooses to ignore these common sense observations and its advocates hide behind the risk piece.
The irony I find in all of this is that many retail investors are under the illusion that a more active approach to asset allocation is indeed being deployed on their behalf. If asked “what would you expect your Australian Equities Fund manager to do if they expected a market crash tomorrow?” most retail clients would answer sell my shares. In this example perception most certainly isn’t reality, the fund manager has no mandate to defend the investors capital.
In my opening paragraph I suggested that the genie was out of the bottle, this is good news for investors as a more active approach to asset allocation is becoming more commonplace within the advice community. As an investor I simply urge you to become educated about the different investment philosophies that are available to you and don’t simply accept that Old Father Time will de-risk your investment journey.
Mark Nagle – Head of Wealth Management, Treysta Wealth Management.