Australian superannuation funds underestimate their exposure to emerging markets in their equity portfolios by as much as 40 per cent, because they only take into account direct exposures.
"If you talk to a typical Australian super fund, they may well tell you that they have an allocation to emerging markets equities of maybe around 12 per cent of their overall equity allocation. That statistic at best is grossly misleading," QIC head of funds management Hazel McNeilage said earlier this week at the Institute of Actuaries Biennial Convention 2011.
"We are now seeing significant globalisation of company revenue streams. Whether you are a European luxury goods manufacturer or a US auto maker, the major markets where you are seeing growth and where you are generating an increasing proportion of your revenue and profits are in emerging markets," she said.
"If you look in a more realistic way at the exposure of a typical Australian superfund to emerging markets, it is probably closer to 40 or 50 per cent of their equity allocation. It certainly isn't 10 or 12 per cent," McNeilage said.
McNeilage argued that the global economy was shifting towards a multi-polar world, in which economic leaders are not replaced but co-exist in a new balance, leading to a convergence of wealth and higher interdependency.
"I believe we are moving into a multi-polar world, so while the US may have dominated financial markets in the past they are not just going to get replaced, by say China," she said.
"It is going to be a much more complex, multi-polar world, where the US, China, Europe, et cetera, all play their roles and will need to learn how to work together."
In this multi-polar world, the labels of developing and developed markets are no longer appropriate, McNeilage said.
"We can't use these labels anymore; different markets have different characteristics, positive and negative and certainly changing [characteristics]. But trying to categorise the world in that way is no longer helpful."
"If it is not helpful to characterise the world in that way, it is certainly not helpful, I suggest, to try and develop investment strategies along those lines," she said.
McNeilage said that the traditional ideas of asset allocation would have to be revised as correlations between asset classes were constantly changing in this new environment.
"If we are in a world, as I suggest, where correlations are not stable, the traditional idea of setting a strategic asset allocation based on long term relationships and typically including some assumptions of stable correlations and rebalancing, I would suggest, is not going to be optimal."
"While it is not necessarily easy to do, I would suggest that we do need to focus on an appropriate way of dynamically focussing our asset allocation. I'm not talking about tactical asset allocation on a daily or weekly basis, but more medium term shifts in allocation," she said.
She also said that investment managers should look for sources of diversification that provide different risk profiles, rather than different asset labels.
McNeilage identified infrastructure as an important opportunity, but also named less commonly used investments, including catastrophe bonds, timber projects and music royalties.
"There is a whole range of things out there when, if you think about them, provide real means of diversification," she said.
