My latest draft article submitted for publication in IFA can be found here. In an nutshell, one of the problems with asset allocation portfolio construction in recent years is the increase in the number of asset classes promising diversification benefits…hasn’t quite turned out that way. Secondly, we’ve seen equity-like risk creeping into the fixed interest and even cash asset classes which have created a few problems in recent times. Thirdly, dealing with rising inflation in retail investment portfolios has traditionally been dealt with via an equities exposure…this is prone to failure as equities can be a very poor hedge to inflation…inflation linked bonds and real assets (not stapled property securities) have proven to be the best inflation hedge.
Understanding total portfolio risks is essential to good portfolio construction and knowing how much market risk (including the possibly hidden equity-like risks) and liquidity risks to name a couple will remove more of the hidden surprises while all markets continue to be volatile.
On Friday the Future Fund published its asset allocation as at 31 December 2009. Before we jump to any conclusions about its make-up its important to understand what the investment objectives are…
CPI plus 4.5% to 5.5%pa over a rolling ten year period with an acceptance of short term underperformance whilst the Strategic Asset Allocation is being developed
The asset allocation of the future fund as at 31 December 2009 is…
- Australian Shares – 12.7%
- Global Shares (developed) - 24.0%
- Global Shares (emerging) – 3.6%
- Private Equity – 2.3%
- Property – 2.9%
- Infrastructure – 2.4%
- Debt Securities – 25.4%
- Alternative Assets – 11.4%
- Cash – 15.5%
- plus Telstra
One can only assume that given the return benchmark, the allocation to cash will continue to diminish (it went from 32% to 15% in one quarter) and the ultimate fund will be relatively aggressive. What any investor can learn from this current asset allocation is the level of diversification across asset class…certainly high.
Australian Government Bond Yields – 29 Jan 2010
Source: Bloomberg
The RBA Cash rate is currently at 3.75% and with government backed 30 day bank bills at 4.12% and the recent tender of 23 March 2010 Treasury Notes fetching a yield of ~3.96% the financial markets are pretty much expecting a 25bps increase.
Whilst the sharemarkets have had the jitters whereby the ASX200 has dropped in excess of 6% this year, it is only government bond with a maturity greater than 1 year whose yields have dropped. The shorter term rates haven’t dropped much at all as the market continue to believe that 2010 will be a year of rising RBA rates.
As for the chart above…it doesn’t really reflect too much of what I’ve said and actually contradicts the 3 month rates I quoted earlier…my only comment is…what’s going on with Bloomberg such that it quotes 3 month Treasury Notes at 3.75%??? Might be best to double check rates from different sources before accepting them.
