According to Justin Tyler, director of boutique fixed income investment management firm Daintree Capital, Australians’ preference for equities is putting them in danger.
Pointing to the Willis Towers Watson Global Pension Asset Study 2018, Mr Tyler noted that Australian pension funds have, on average, a 49 per cent allocation to equities. This is edged out by US funds’ 50 per cent allocation and slightly higher than the UK’s 47 per cent.
It is, however, significantly higher than Japanese funds’ 30 per cent allocation, and the Netherlands’ and Switzerlan’s 33 per cent allocations.
The Daintree Capital director suggested the heavy weighting to equities was symptomatic of Aussie investors’ lack of familiarity with the bond market and the current, albeit contested, franking credit regime.
“Equities may be better understood by most investors as an asset class, but fixed income plays an equally important role in a portfolio – one of insurance,” he argued.
“The fixed interest component of a portfolio smooths out negative returns to limit falls in a portfolio’s value when equity markets go south.
“Australian retirement funds on average have just a 14 per cent allocation to bonds, compared to a 22 per cent average in the US and 36 per cent in the UK, so it would seem that those approaching retirement are taking excessive risks with their savings in exposing themselves to the twists and turns of the equity market.
“This is particularly the case given that Australian retirement savings are made up almost entirely of ‘defined contribution’ style schemes – meaning income in retirement is dependent upon the investment returns generated by the fund, rather than linked to an individual’s working salary as it is in many other markets.”
The same Willis Towers Watson study placed Australia’s pension market in first place, thanks to its 12.1 per cent per annum growth in pension assets over the last 20 years.