Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Super returns come roaring back
Chant West estimates that the median growth fund is up 8.8 per cent for the year in an “excellent result under challenging circumstances”. Strong share markets have been the main driver of the return, particularly international shares, which have returned a “staggering” 22 per cent over the period off the back of the AI boom.
“While Australian shares haven’t reached the same heights this year, they’ve still delivered a solid 9.5 per cent over the same period,” said Chant West senior investment researcher Mano Mohankumar. “At a time when many Australians are feeling financial stress due to high inflation and high interest rates, the better-than-expected calendar year return will provide some good news.
“It’s a reward for super fund members who have remained patient and maintained a long-term focus. A final result close to the 8.8 per cent estimate would more than offset the entire 2022 calendar year loss of 4.6 per cent.”
Australian shares rose 5.1 per cent through November, while international shares did 8.4 per cent in hedged terms (Australian dollar appreciation pulled that return back in unhedged terms). Australian and international bonds returned three per cent and 3.2 per cent respectively. But signs of slowing economic growth in the US, stubborn services inflation and geopolitical risk means market volatility “is unlikely to disappear” anytime soon.
“However, super fund members should take comfort in the fact that most Australians are invested in well-diversified portfolios that have their investment exposure spread across a wide range of asset classes,” Mohankumar said. “That diversification helps provide smoother returns during periods of market volatility.”
