Australian industry superannuation funds: Investment strategies and property allocation

Abstract

Purpose

To achieve long‐term performance, superannuation balanced funds typically invest in a range of defined asset classes based on a strategic asset allocation approach. In an Australian context, the purpose of this paper is to examine the performance of the balanced investment option against eight different investment strategies and how the property allocation changes with different asset allocation models.

Design/methodology/approach

The analysis is based on ex post data covering 17 years (1995 to 2011). The selected passive and active allocation models are set within the modern portfolio theory framework utilising Australian ten year bonds as the risk free rate. The Sharpe ratio is used as the key risk‐adjusted return performance measure.

Findings

Property provided the second highest risk adjusted return profile behind the alternative asset class. The different asset allocation models perform as well as the conventional strategic approach and in many instances property allocation is found to be under‐allocated on a return optimisation basis. Depending on the asset allocation model, property when included within a multi‐asset portfolio improves the portfolio risk‐adjusted return profile by 2 per cent to 28 per cent.

Practical implications

For an Australian superannuation balanced fund, the empirical results show that there is scope to increase the property allocation level from current 10 per cent to 23 per cent. This knowledge will be beneficial for funds currently re‐profiling investment portfolios to achieve stable risk‐adjusted returns.

Originality/value

The research contributes to both practical and academic fields, as it offers a methodological approach on how allocation to property assets can be improved using a series of passive and active asset allocation strategies.

Citation

Reddy, W., Higgins, D., Wist, M. and Garimort, J. (2013), "Australian industry superannuation funds: Investment strategies and property allocation", Journal of Property Investment & Finance, Vol. 31 No. 5, pp. 462-480. https://doi.org/10.1108/JPIF-02-2013-0009