Planners cautioned on objective based strategies
Morningstar has cautioned planners looking to adopt alternative investment strategies to be cautious around the use of objective-based and lifecycle funds stating they may venture into risky assets or restrict investments into set models that ignore investor's particular needs.
The research house made the warning in its Sector Wrap-Up report for multi-sector funds which, at March 31, held more than $459 billion in investments via retail funds, superannuation funds, pensions and insurance bonds.
Morningstar Senior Research Analyst Brook Sweeney said interest had shifted away from traditional strategic asset allocation (SAA) towards alternative investment strategies due to "bouts of extreme market volatility and the poor performance of growth assets".
Sweeney stated that while objective-based funds are well-diversified and with lower volatility than SAA strategies they were ‘no magic bullet'.
He said objective based funds do not have set asset allocations and may substitute growth assets for defensive assets with fund managers possibly using riskier assets to boost performance.
Sweeney also stated that while lifecycle funds can automatically adjust an asset allocation mix to suit an investors age and time-frame the "one size fits all approach has its challenges" in that the funds do not account for individual circumstances and for the present value of future wages.
He said each investment approach has merits and drawbacks and that a pure SAA approach was uncomplicated and provided diversification and liquidity.
"The significantly greater flexibility of objective-based strategies allows fund managers to allocate between assets aggressively. However, it's important to recognise the potential impact on performance and the effect of mistiming aggressive asset allocation calls. It's difficult to achieve consistently successful results with objective-based approaches, and it adds costs," Sweeney said.
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Jason Spits
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