Speaking at a media briefing in Sydney on Thursday, Heuristic Investment Systems head of asset allocation, Damien Hennessy, said the traditional 60:40 portfolio allocation is no longer viewed as the most logical investment ratio.
“Bonds might still offer diversification in a deflationary scenario but with starting point yields so low and some emergence of inflation risk, we cannot be entirely confident that bonds will provide the buffer they have in the past. Investors have to consider other lines of defence for their portfolios,” Mr Hennessy said.
“A portfolio’s strategic asset allocation is one of the key drivers of the variability of returns across funds while manager selection is also critically important. Dynamic asset allocation provides a further source of return enhancement or risk mitigation for a portfolio. An investor ideally wants all areas contributing to better portfolio outcomes.
“In addition to current elevated valuations, macro factors such as interest rates and inflationary pressures are increasingly having an impact on the strategic and tactical execution of asset allocation strategies.
“For investors wary of valuations, embedded risk factors and sector skews inherent to benchmarks, active investment management will be the key to managing risk over the long term.
“Investors are becoming much more discerning in their investment decision-making and in the past 12 months alone, we have noticed a significant rise in interest from investors in strategies that incorporate sustainability goals.”
Meanwhile, Zenith Investment Partners’ head of real assets and listed strategies and chair of Zenith’s responsible investment committee, Dugald Higgins, noted that despite its growing awareness, a clear understanding of how to “effectively integrate” ESG factors in portfolios is yet to be laid out.
“The ‘large cap bias in ESG’ – where large companies often score higher in ESG due to greater resourcing capabilities – is also a prevalent issue when examining fund managers,” Mr Higgins said.
“There is a rapidly widening gap in intensiveness of ESG integration that will likely become more pronounced for those fund managers who lack the resources to critically assess these issues.”
