What if we are right?

Implications of low return forecasts for Balanced Funds

The point of this note is to highlight the embedded shortfall risk in a typical fixed SAA investment strategy (e.g. the typical Australian balanced fund) should returns be low (and clustered) as we currently project.
Aggressive asset allocation within narrow ranges is also unlikely to solve the problem given the structural anchoring to equity market outcomes and the relatively narrow tactical ranges… this is an inherent structural flaw within the SAA model.
The practical implication is that this significantly limits the ability of managers of these types of portfolios to “turn the dial” sufficiently in an environment of compressed and clustered returns or where equity returns are moderate.

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