Australians have been short-changed by the traditional one-third home-equities bias in balanced options because the local market accounts for only 3 per cent of the world's bourses.
MLC Investment Management investment strategist Brian Parker said balanced funds had not delivered adequate returns for the average client because asset allocations were not sufficiently diversified locally and overseas.
Yet, ironically, now was not the time to sell all equities and flee to cash or bonds.
"In the rush to cash, investors are throwing the baby out with the bath water," Parker said.
"Now is not the right time to get out of equities. Equities are cheap, so, perversely, it's time to buy at a reasonable price and at the right time.
"Also, to put it (cash) all into fixed-income is also not the answer - you get better and more diversity through a global mix."
Good quality active managers - who were genuinely active managers - gave the best reward for the risk.
"We get nowhere by benchmark and peer-hugging. This is madness, it's too short-term and just not active enough," he said.
Alternatives had to be genuine alternatives, with low correlations to the markets, and managers had to manage actively.
Parker said: "This feels a lot like 1992. A lot of investors looked at the five-year returns on equities, bonds, cash, and decided to get out. Then, in 1993, the sharemarket returned 25 per cent. I'm worried this is happening again."
"Good advisers will know how much risk their clients are genuinely willing to take. If you scratch someone who says they're a growth investor, often you find someone who is really a conservative investor.
"We're in for a lot of pain in the next few years as people who were in growth funds find out that they were really conservative investors."
Actuaries were responsible for a lot of the problems because they had defined risk as volatility, Parker said.
"We have to rethink this and focus on returns first, not returns as an afterthought. Managers must be genuinely active and turn on the risk when it will be rewarded, and take risk off the table when it will not be rewarded," he said.
Asked if Parker was 'talking his own book', he conceded that this could be the case "but I genuinely believe you have to take a long-term view".
MLC's LTAR fund (Long Term Absolute Returns) was launched in late 2005. Its gross returns ran at 3 per cent for the early years, rising to 11 per cent more recently.
"MLC is a $50 billion fund manager, but only about $50 million of that is in the LTAR fund," he said.
