Evaluation of Australian industry superannuation fund performance; asset allocation to property
| DOI | https://doi.org/10.1108/JPIF-12-2015-0084 |
| Date | 04 July 2016 |
| Published date | 04 July 2016 |
| Pages | 301-320 |
| Author | Wejendra Reddy |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
Evaluation of Australian
industry superannuation
fund performance; asset
allocation to property
Wejendra Reddy
School of Property, Construction and Project Management,
RMIT University, Melbourne, Australia
Abstract
Purpose –Property is a key investment asset class that offers considerable benefits in a mixed-asset
portfolio. Previous studies have concluded that property allocation should be within the 10-30 per cent
range. However, there seems to be wide variation in theory and practice. Historical Australian
superannuation data shows that the level of allocation to property asset class in institutional portfolios
has remained constant in recent decades, restricted at 10 per cent or lower. This is seen by many in the
property profession as a subjective measure and needs further investigation. The purpose of this paper
is to compare the performance of the AU$431 billion industry superannuation funds’strategic
balanced portfolio against ten different passive and active investment strategies.
Design/methodology/approach –The analysisused 20 years (1995-2015) of quarterlydata covering
seven benchmark asset classes, namely: Australian equities, international equities, Australian fixed
income, international fixed income, property, cash and alternatives. The 11 different asset allocation
models are constructed within the modern portfolio theory framework utilising Australian ten-year
bonds asthe risk free rate. The Sharpe ratiois used as the key risk-adjustedreturn performance measure.
Findings –The ten different asset allocation models perform as well as the industry fund strategic
approach. The empirical results show that there is scope to increase the property allocation level from
its current 10-23 per cent. Upon excluding unconstrained strategies, the recommended allocation to
property for industry funds is 19 per cent (12 per cent direct and 7 per cent listed). This high allocation
is backed by improved risk-adjusted return performance.
Research limitations/implications –The constrained optimal, tactical and dynamic models are
limited to asset weight, no short selling and turnover parameters. Other institutional constraints that
can be added to the portfolio optimisation problem include transaction costs, taxation, liquidity and
tracking error constraints.
Practical implications –The 11 different asset allocation models developed to evaluate the property
allocation component in industry superannuation funds portfolio will attract fund managers to explore
alternative strategies (passive and active) where risk-adjusted returns can be improved, compared to
the common strategic approach with increased allocation to property assets.
Originality/value –The research presents a unique perspective of investigating the optimal
allocation to property assets within the context of active investment strategies, such as tactical and
dynamic models, whereas previous studies have focused mainly on passive investment strategies.
The investigation of these models effectively contributes to the transfer of broader finance and
investment market theories and practice to the property discipline.
Keywords Asset allocation, Property, Superannuation, Modern portfolio theory, Diversification options,
Portfolio construction
Paper type Research paper
Journal of Property Investment &
Finance
Vol. 34 No. 4, 2016
pp. 301-320
©Emerald Group Publis hing Limited
1463-578X
DOI 10.1108/JPIF-12-2015-0084
Received 22 December 2015
Revised23February2016
Accepted 23 February 2016
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
It is acknowledged that an earlier version of this paper was published in the author’s PhD
dissertation “Australian managed funds: investment strategies and property allocation”at the
RMIT University in 2014.
301
Evaluation of
Australian
industry
1. Introduction
In Australia, superannuation or “pension fund”is an important source of retirement income
arrangement for its aging and growing population. Superannuation funds are savings
vehicles used by employers and employees with the objective of providing members the
benefit of future retirement income. In the 1980s, it became clear to the Australian
government that th e country’s demographic trends could not forever sustain a retirement
income system reliant upon the taxpayer-funded pension schemes, and that Australians
would need to set aside part of their current income to fund their own retirement.
Superannuation contributions became a compulsory requirement in July 1992, when the
Australian government introduced the current superannuation guarantee system. The
initial compulsory contribution rate was 3% and has since gradually increased to 9.5%
(APRA, 2015; Deloitte Touche Tohmatsu, 2009).
The continued flow of money mean that superannuation industry assets under
management have increased sixfold (or 605 per cent) since early 1990s to AU$2
trillion (£961 billion) in June 2015. This makes Australia the fourth largest
superannuation market in the world, behind USA, Japan and UK. Consequently, in
the past decade investments in the Australian property market also increased
from AU$100 billion in 2000 to almost AU$700 billion currently. However, the
proportion allocated to the property asset class in institutional portfolios remains
unchanged, at 10 per cent or lower (APRA, 2015, p. 21; CoreLogic, 2015; PCA, 2011,
p. 6). While several overseas studies (Craft, 2001; Hoesli et al., 2003; Worzala
and Bajtelsmit, 1997) have suggested property allocations within a range of
10-30 per cent, comprehensive empirical evidence on Australian institutional
property asset allocation strategies is underdeveloped. To address the gap in
literature, this research critically evaluates the performance of the AU$431 billion
industry superannuation fund’s conventional strategic balanced investment
portfolio with ten alternative asset allocation models.
At June 2015, the Australian superannuation industry consisted of 245 institutional
funds and 562,466 small self-managed funds (DIY Funds). Generally, Australians have
three superannuation investment options: not-for-profit funds, retail funds, and self-
managed super funds (SMSFs). Each superannuation fund type provides specific
benefits. The Australian superannuation industry sectors include:
(1) Not-for-profit funds:
•corporate funds –designed to benefit employees of a particular company or
group of companies;
•industry funds –designed for employees working in a common industry or
group of associated industries operated by parties to industrial awards
(usually employer associations and/or unions); and
•public sector funds –sponsored by federal or state government employer or
government controlled business enterprises.
(2) Retail funds –pooled superannuation products sold through intermediaries to
the general public. This includes retail master trusts and other superannuation
products offered by life insurance companies.
(3) Small funds or SMSFs –funds where small groups of less than five individual
members operate their own fund and all members are fund trustees or pay a
professional trustee company to provide this service (APRA, 2015).
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