The report adds that ‘many pension funds feel they need external expertise in global debt, Asian debt or emerging market debt as well as global or emerging market equities, hedge funds, and other alternative asset classes.’

An estimated US$1.07 trillion was accessible to external managers (as at end 2011), which represents 11.4 percent of the region’s total investable assets, according to Cerulli.

The average Superannuation Fund allocation to Australian Equities is 30%. To International Equities it is 25%. Total Equity asset allocation is 55%. So in general, portfolios have been subjected to August 2011’s massive volatility. This is just totally and utterly wrong!

Lucky that 2011 performance is measured to June 30 and doesn’t include the recent volatility.

Asset allocation must be tactical. Default Strategic Asset Allocation, just doesn’t work. I have previously mentioned Future Fund’s total equity allocation as ranging from 28% up to 38%. Domestic and International. I recently met with the Future Fund and we discussed equity exposure. As at a couple of weeks ago it was around 30% which included Domestic and International Shares. How did they get to an asset allocation which is nearly half of the standard Superfund? FF use a top down macro approach to markets. FF’s Portfolio Managers PMs, implement the macro strategy by allocating to managers in those asset classes or by direct asset exposures. A strategy group or committee look at market inputs and they a call. These inputs are probably closely discussed with the PMs and then the asset class allocation is implemented. FF could correct me if I am wrong but I am fairly sure that this is their approach.

Just think about it? There are enough market metrics and inputs that will give you a top down approach to investing over the short, medium and long terms. Years ago I worked as a floor trader on the Sydney Futures Exchange. Most of us never held ourselves out to be top quartile analysts but we were very close to market movements and psychology. Fear and greed moving markets. Patterns repeat, over and over. One of the simplest momentum indicators was the Weighted Moving Average Crossover. One market guru who seemed to have an uncanny knack of picking markets simply used a 30 day and 90 day Moving Average Crossover to tell him whether markets were trending up or down. We used other well known technical indicators such as the 14 day Relative Strength Index which gave you an idea of whether markets were overbought or oversold. You can’t tell me that you couldn’t run some set of quantitative factors which assisted a Superfund manager in down weighting exposures to various asset classes, in particular equities. Infact, any asset class could be monitored as to whether is was at the top end or bottom end of relative risk value.

Recently, Challenger have been running TV ads describing their annuity products which are not affected by equity market downturns. The ads are very specific in targeting retirees who have been affected by the Global Financial Crisis. Challenger is right on the money here. Investors will not accept significant risk asset downdrafts affecting their planned retirement. Mark Bouris, the very high profile Chairman of Yellow Brick Road recently wrote an article in the Sunday Telegraph highlighting the recent equity market volatility and the need for retirees to diversify into assets specifically Fixed Income and Credit. This is the same as the Challenger message and it will steadily gather momentum. Superannuation Funds will be questioned on return and volatility related to equity exposure. Maybe the horse has bolted and with equity markets down as much as what they are, now may be not the time to sell.

Having said that, I think equity markets will be in a down to sideways market for some time. Fixed Interest, Corporate Credit, Cash Term Deposits, Gold, and Short USD positions must be considered in Superfund portfolios. Or an increased allocation to these assets. I understand that only 2% of global gold holdings are attributed to Pension Funds. Rainmaker reports that in 1997 Fixed Interest and Cash made up 39% of Superfund asset allocation. That amount has dropped to the current 34%. This amount was a bump from the down trend because of the GFC. The projected asset allocation is to fall to 26%. Considering where our cash rates are, that is appalling! This 55% asset allocation to Equities will come under scrutiny and Trustee Boards will be held to account. I am not sure that I would want to be a Superfund Trustee. In the years to come, I can see some very unhappy members phoning Trustees complaining about their retirement nest eggs. When the results from MySuper start to be reported, this unhappy state of mind will only gather momentum.