The asset management firm believes the traditional superannuation balanced fund, with its 70 per cent 30 per cent split in allocations to growth and defensive assets, is limiting to investors.
“These fundamental limitations in portfolio construction still persist today. Equities still dominate the average retirement fund in asset allocation, risk and return,” said Dan Farley, investor solutions group head of SSgA.
“The dilemma for retirees is that longevity calls for the need to invest in equities to provide capital growth and regular dividends. Ways to mitigate equity risk are therefore critical to retirement mandate design,” he added.
The typical balanced fund returned 14.7 per cent before fees for the last financial year. However, SSgA pointed out these funds only returned 3.8 per cent per annum on average over a five-year period.
This approach to portfolio construction, adopted by many funds as their default investment option, also fails to address the risks in extreme economic circumstances, SSgA argued.
“The big problem back in 2007 was that most funds adopted a static asset allocation to traditional growth and defensive assets based on long-term assumptions. This has been the model most commonly adopted since the introduction of Superannuation Guarantee in 1993, and has failed to evolve with the needs of investors and the market environment,” Mr Farley said.
SSgA also highlighted that relying solely on the diversification of traditional assets is not enough, and is another reminder of the limitations of current portfolio design.
“The underlying investments were not fit for the purpose and the right assets were not allocated for the right market environment. This is particularly apparent for those in or approaching retirement,” Mr Farley stated.
“There was no change in construction based on the investors’ stage of life, no explicit risk or return targets, no account of retirement lifestyle needs or investor behaviour and no explicit management of equity risk,” he added.
SSgA said it is planning to launch a suite of objective-based retirement investment funds. The funds will have a different portfolio construction approach and have been specifically designed for Australian superannuation and retirement investors.
“Next month, we will launch three cost-effective, objective-based funds for the financial advice industry that address the lifestyle needs of a range of investors, from the important retirement planning years whilst still in employment, through to active retirement and the later years,” Amy Johnston, vice president of wholesale sales at SSgA in Australia stated.
