Investment Strategy
The formulation of investment strategy is a fundamentally important task, even more so than the selection of investment managers. Unfortunately, this critical aspect of the investment process is often not treated by investment consultants with the importance which it demands, and the methodology which is followed in formulating investment strategy is often influenced too strongly by practices which others follow.
The single most important mistake made in formulating investment strategy for a superannuation fund is to develop it without sufficient analysis of the liabilities of the fund or its demographics.
Our Method
Our method commences with the compilation of member data, fund documentation and all other relevant information, and follows an ordered process of analysis, design of investment structure, identification of investment sectors and formulation of investment strategy. A demographic analysis is undertaken in conjunction with an analysis of benefit design and fund liabilities, in order to provide a basis for the design of the proposed investment structure and, if applicable, the design of member investment choice options.
The method employed in identifying the most appropriate investment sectors follows an order from set to subset, commencing with the primary division of assets between debt and equity and moving through second and third-order divisions within each of those asset types. It includes an analysis of return correlation coefficients between investment sectors, the effects of various degrees of foreign currency exposure, and includes alternative investments such as absolute return funds and private equity.
Benchmark sector weightings are then determined with the assistance of optimisation software to identify a robust set of efficient portfolios. The strategy for security selection within each sector is formulated after considering the advantages and disadvantages of actively-managed versus passively-managed funds, including the tax implications of each approach and the practical considerations of product choice. The merits of tactical asset allocation (market timing) between sectors is also considered.
The final component consists of reviewing the liquidity requirements of the fund and formulating the Funds’ re-balancing strategy. The latter includes the use of specialised software which optimally uses a fund’s inward and outward cash flows in the re-balancing process.
The consulting service ensures the establishment of meaningful and realistic investment objectives, and identifies the strategic options available for achieving them. The agreed level of risk is quantified in terms of the universe of permissible assets and limiters on the tactical asset allocation ranges which may be adopted by the scheme as a whole. A range of potential combinations is examined from single to multi-manager structures, including sector specialist and balanced manager options.
Further Information
If you feel that your fund could benefit from an independent review of its investment strategy, please contact us.
If you are not sure of whether a review is appropriate in your circumstances, or if you would like some indication of the prospective benefits of a review, then we can assess your existing arrangements and advise you of the best course of action.