Risk reduction strategies like diversification and cash allocation do not mitigate risk in superannuation portfolios, according to research from Griffith University.
At the Platypus Asset Management symposium in Sydney yesterday, Griffith University’s Dr Adam Walk said regimes – periods of change in returns and volatility – hold particular interest to investors in superannuation funds.
He said his research into regimes found that asset class diversification or lowering risk through cash-based investments do not help manage the activity of regimes.
“Regimes seem to exist in both diversified funds and lower risk portfolios,” Dr Walk said.
“Comparing this work to the literature, it doesn’t seem that diversification or risk reduction appears to change regime behaviour very much.”
Dr Walk’s research compared the effect of regimes on a low-risk cash portfolio and a moderate to high-risk diversified portfolio by putting their returns into a statistic model.
The finding suggested that despite the two superannuation fund investment portfolios being on opposite sides of the risk spectrum, their returns were similar.
“We don’t think diversification protects people from regimes, but people haven’t particularly taken portfolio construction from the perspective of regimes,” Dr Walk said.
He said the research should be used to find better approaches to risk mitigation.
“This isn’t the answer, this is more of a question,” Dr Walk said. “This is what data looks like through this [model]; how can we move toward better approaches to portfolio management and trading strategies?”
