Fronting up on asset allocation

I think a conservative default option is right for KiwiSaver and this approach has been vindicated by the volatility of all growth sectors since launch. After all, thousands of members have automatically enrolled and have done nothing else. Those that want alternative investment options are free to do so.

From 2010 many KS members may realise, for the first time, that their non-Govt KS funds can be used to help buy their first home. If a lifestages approach had been adopted, these members would be distressed to see negative returns and be unhappy.

I don't think exposure to volatile sectors is appropriate without the investor knowing exactly what they are doing, either with or without advice. In the meantime, the funds rest in a conservative berth until the provider is told otherwise by the investor.

NZ fund managers basic asset allocation includes stocks, bonds, fixed interest, property and cash. What I find lacking from NZ fund managers is the skills to use derivatives to generate returns. I will now hear a chorus of excessive leverage and risky investments. Managed futures managers who apply strict risk control and trade with high quality counter parties on risk adverse exchanges have demonstrated futures can be less risky than the underlying investments NZ fund managers use. Other attractions of the futures markets is they are highly regulated, they use clearing houses which guarantee transactions (no counter party risk), highly liquid, transaction costs only a fraction of what other markets charge. So where are New Zealand's "turtle traders"? The answer is we can't afford them in NZ.

Commodity Trading Advises are investment companies which need multi-billion dollar assets under management to fund their technology and research teams. Which brings me to the point, NZ fund managers haven't got a hope, their only way forward is to allocate a higher proportion of funds to cash in the hope of reducing their likely losses and out performing their peers in the current market.

The major question which needs answering is, why don't NZ Advisers and investors insist on greater performance from the NZ funds management industry? a cynic might say it is probably due to what you don't know you don't miss.

It is also a sad indictment on our NZ funds management industry when the conservative default option is right for most KiwiSaver investors. The Morningstar KiwiSaver league tables show the best of breed default providers had a 1.91% return for year end 31/3/09. A disappointing result if you consider CPI is running at 3%. Just as well the employers 2% is making up for the loss to inflation.

The way forward for asset allocation. The herd will probably continue to follow the failed model, or adopt the nil sum capital guaranteed model of investing a dollar to get a dollar back in real terms in 5 to 10 years time. Those Advisers smart enough, will abandon the failed model and with some sound research will soon find the way forward.

Peanut said:
"What I find lacking from NZ fund managers is the skills to use derivatives to generate returns"

Does Fidelity Life's Options Portfolio not, indeed, meet this desciption? True, it is alone in the space, and Fidelty Life is a small player, that would probably barely breach the horizon of the pointy-headed investment advisers.

I don't know of any NZ fund manager who has a trading program which forms part of the Stark 300 Trader Index, which is compiled using the top 300 trading programs from Stark's database of Commodity Trading Advisers programs.

What I believe we need from a cone headed NZ Advisers perspective, is managed futures which can enhance the diversification of a portfolio and therefore play an important role in improving the risk and reward characteristics of that portfolio, whether traditional or alternative.

The question is, if we have a traditional portfolio of 30% equities and 70% bonds how can we guard against falling equity prices and rising interest rates?

We all due respect to Fergus's - Fidelity Life's Options Portfolio, using the Options Portfolio to protect a portfolio against rising bond interest rates would be as much use as putting a Morris Minors hubcap under your arm and pretending you are an AMG Mercedes.

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