Investors are chasing returns, not asset classes and may need to rethink traditional asset allocation models, according to Principal Global Investors (Australia) Grant Forster.
Findings from the Principal Global Investors’ commissioned CREATE-Research report “Pragmatism Presides, Equities and Opportunism Rise” found pragmatism defines investors’ approach to equities, and that the ‘bondification’ of equities will continue to gain traction.
Chief executive of CREATE-Research, Amin Rajan, said “investors understand that future returns from most asset classes will be much lower than in the past, and with bond valuations at historic highs, it’s no surprise that equities have been in favour over the past few years.”
The report found that there is a mood of caution in regards to equities. Concerns about low and uneven growth in global economies and fears about the prospective rate hike in the US are driving investors to defensive stocks with a strong dividend stream, good free cash flow, less debt, and high return on equity.
“This is what is meant by the ‘bondification’ of equities. Investors know they can’t afford to be too risk averse in an environment of artificially suppressed interest rates, so they are hoping for the best of both worlds,” Rajan said.
Commenting on asset allocation, Forster said traditionally asset allocation would be tilted to the so-called ‘growth’ asset classes, like equities, when investors are young, but that retirees or near retirees should be overweight in bonds and not take risks.
“Investors may need to take the opposite approach if they are to capture the yield they need in retirement. In fact, some overseas defined-benefit funds are starting to keep a significant part of their portfolios locked into equities right through the retirement phase,” he said.
“Australians should be re-thinking their domestic equities bias, and looking overseas for deeper markets and better opportunities.”
