State Super has completed its annual review of the investment strategy for the Pooled Fund, and has made the following changes, to State Super’s investment strategies effective from 1 July 2016.
The changes outlined below have been introduced to enhance and protect the strategies and will not affect the overall risk and return profiles of each of the strategies.
Changes to the return objectives
Growth Strategy
The return objective for the Growth Strategy has been lowered slightly, from CPI + 4.5% p.a. to CPI + 4.0% p.a. over rolling ten-year periods.
State Super’s Growth Strategy has a 16% strategic asset allocation to the liquid defensive asset class which includes cash and foreign and domestic fixed interest (sovereign bonds). State Super expects official cash rates to remain in line with expected inflation levels, and global monetary policies to continue to ease. As a result the liquid defensive asset class is expected to perform in line with inflation which in turn reduces the expected overall return for the Growth Strategy.
University Conservative Diversified Strategy*
The return objective for the University Conservative Diversified Strategy has been lowered, from CPI + 2.0% p.a. to CPI + 1.0% p.a. over rolling three to five year periods.
State Super’s University Conservative Diversified Strategy has significant outflows that require greater liquidity. As a result the strategy has a 72% strategic asset allocation to the liquid defensive asset class. As with the Growth Strategy, the expected reduction in returns for liquid defensive assets has led to a reduction in the expected overall return for the University Conservative Diversified Strategy.
*The University Conservative Diversified Strategy closed on 28 February 2021.
Strategic asset allocation changes
As part of the review, a number of minor strategic asset allocation changes have been made both within and between asset classes across the State Super Growth, Balanced, Conservative and Trustee Selection Strategies. Some of these changes have been to re-weight the allocation between the liquid defensive and alternatives asset classes, but the majority of changes have been within the categories (i.e. liquid growth, liquid defensive and alternatives) in order to provide an increased opportunity for greater returns, improved diversification and additional downside risk protection.
Growth Strategy
No change has been made to the allocation between liquid growth, liquid defensive and alternatives.
Within the liquid growth category there has been an increase to emerging market equities at the expense of developed market equities.
Liquid defensive category has been adjusted to introduce a weighting for inflation linked bonds (domestic and international) at a rate of 2% which has been financed from a decrease in the weighting to Australian fixed interest.
The biggest changes to the Growth Strategy have occurred within the alternatives category with the introduction of a 4% allocation to alternative debt. This allocation can include strategies like corporate credit, high yield bonds, and emerging market debt.
Balanced Strategy
A very minor increase (0.5%) has been implemented for the alternatives category along with a corresponding reduction towards the liquid defensive category (in particular cash).
As is the case with the Growth Strategy the liquid growth category within the Balanced Strategy has seen a small increase to emerging market equities at the expense of developed market equities.
The liquid defensive category has been adjusted to introduce a weighting of 2% to inflation linked bonds (domestic and international) which was again financed from a decrease in the weighting to Australian and international fixed interest and cash.
Within alternatives category an allocation of 2% to alternative debt was introduced and other opportunistic investments were re-allocated to focus on income producing strategies and downside risk protection.
Conservative Strategy
A minor increase of 1% for the alternatives category and a corresponding reduction towards the liquid defensive category (in particular cash) has been implemented.
The liquid growth category has again had a minor increase to emerging market equities at the expense of developed market equities (0.5%).
The liquid defensive category within the Conservative Strategy has been adjusted to introduce a weighting of 2% to inflation linked bonds (domestic and international) once again financed from a decrease in the weighting to Australian and international fixed interest and cash.
The alternatives category has had an allocation of 1.5% to alternative debt introduced and other opportunistic investments were re-allocated to focus on income producing strategies and downside risk protection.
Trustee Selection Strategy
An increased weighting of 2% has been provided for the alternatives category with a corresponding reduction to the liquid defensive category (reductions of 1% for Australian fixed interest, 0.5% for international fixed interest and 0.5% for cash).
Within the liquid growth category there has been a minor increase to emerging market equities at the expense of developed market equities (1%).
Within alternatives a re-allocation from higher risk strategies into alternative debt and defensive strategies were the focus to increase downside risk protection in the portfolio.
No changes have been made to the asset allocations for Cash, University Conservative Diversified and University Cash Strategies.
Dynamic asset allocation changes
Changes to the dynamic asset allocation ranges of the State Super investment strategies are limited to the Balanced, Conservative and Trustee Selection Strategies. The changes to these strategies correspond with the percentage changes made to underlying strategic asset allocations.