Standard asset allocation models ‘outdated’

A common industry asset allocation method of using a passive core and adding alpha satellites is “outdated,” according to Pengana Capital, particularly as a strategy in SMSF portfolios.

This approach fails to consider that equity markets dominate most of a portfolio’s return, Pengana Capital’s head of distribution, Damian Crowley, told SMSF Adviser.

Mr Crowley said a preferable approach for SMSF portfolios is to think in terms of beta and alpha, ensuring investors still have protection if the market falls.

“For a highly diversified portfolio, there should be a significant weighting to funds that generate returns largely independently of the movement of equity markets. That is, absolute-return funds that focus more on alpha and not beta,” Mr Crowley said.

“If the market falls which it can do... a lot of people wouldn’t have any protection in their portfolios,” he added.

Mr Crowley also warned the weak macro-economic outlook for G7 countries is suggesting markets are unlikely to generate good returns, and volatility may also increase.

“This new environment means that the market return, or beta, may not provide the tailwind that it did during the 20-year bull market that ended with the global financial crisis,” Mr Crowley said.

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