Superannuation funds should first review the suitability of their existing strategic asset allocation policy before rebalancing, according to Watson Wyatt.
Negative returns have left many funds substantially underweight to risky assets. However, rebalancing is not necessarily a risk-reducing activity because buying risky assets as they fall in value will only increase losses if their value continues to decline, Watson Wyatt Australia head of investment consulting Graeme Miller said.
"Our view is that institutional funds should review their strategic policy before rebalancing, as we see a number of reasons why many funds might prefer a lower allocation to risky assets in the short term than their strategic policy suggests," he said.
The main reasons for this were uncertainty in the economy and capital markets, higher volatility and potentially higher returns per unit of capital invested, Miller said.
"While changing the choice of a strategic benchmark is not a decision to be made lightly, we think the economic, capital market and political environment is now very different to when most funds set their current strategic benchmarks," he said.
"In particular, we believe that any review of strategy should include stress-testing the behaviour of the portfolio in particularly adverse circumstances."
Recent market events have challenged institutional investors' strategic asset allocation decisions, Miller said.
"Some funds rebalanced in order to maintain their strategic benchmark weightings, while others needed to actively reduce equities and increase cash and bonds to address solvency issues," he said.
