Australian investors are being exposed to very high degrees of risk due to the illogical use of resources in their portfolios, funds management group Pengana Capital has warned.
Local investors are overexposed to iron ore and the specific commodities of coal, natural gas and gold due to the composition of the Australian Securities Exchange (ASX), Pengana Capital chief executive Russell Pillemer told InvestorDaily.
The ASX All Ordinaries Index accounts for only 7 per cent of the global resources market, thus Australian equity fund managers were ignoring 93 per cent of opportunities and diversity available, Pillemer said.
"Resource companies account for about 26 per cent of the ASX All Ords, so it's not surprising that most Australians have a significant allocation of their savings invested in the resources market through their Australian equity funds," he said.
"But when you actually analyse that underlying part of their portfolio, you quickly come to the realisation that it makes no sense because the resources market is a global market."
The recent falls in iron ore prices have exposed these major flaws in standard portfolio construction and would compel investors to question the added volatility and look at alternatives investments, Pillemer said.
"We want to emphasise that this is a very misunderstood area because I don't think that the average investor out there realises that they have hugely limited the amount of companies they're investing in, in a global market.
"It's creating a level of volatility in your portfolio that you really should not have but it's historically been driven by the mandate requirements of the equity managers, the gatekeepers, which is to beat the index - not to worry about investors or how it performs absolutely."
He said it was now the responsibility of equity managers to acknowledge that this style of investing is illogical and was subjecting investors to huge amounts of risk and volatility.
"You can almost liken this to what happened in property investing where several years ago, all the mandates were for domestic property and then virtually within a couple of years, most have moved to international property investing," he said.
"It didn't make sense at the end of the day to limit [exposure] to the local market so those mandates moved to be global mandates. It doesn't take much to see that it's a nonsensical approach so it's now our responsibility to [inform] investors to start adjusting their portfolios."
