STC has completed its annual review of the investment strategy for the Pooled Fund, and has made the following changes, effective from 1 July 2013.
A change to the return objective for the Cash Strategy
STC has revised the return objective for the Cash Strategy, from CPI + 1.5% p.a. over rolling three-year periods to CPI + 0.75% p.a. over rolling three-year periods. This change reflects official cash rates being significantly lower than they were at same time last year, and STC's view that it is unlikely the Cash Strategy would be able to deliver a real return in excess of 0.75% over the next three years, given that the strategy is invested only in short-term cash instruments.
Asset allocation changes for the Balanced and Conservative strategies
Looking ahead to the next three to five years, STC considers that interest rates will likely be significantly higher than they are now. Central banks, especially the United States Federal Reserve, are expected to embark on policies that will result in a normalisation in interest rates compared to the very low levels that have prevailed recently.
Higher interest rates will have a negative impact on fixed income portfolios, which could result in negative returns. To reduce this risk in the Balanced and Conservative strategies, STC has decided to reduce the strategic asset allocations to Australian and international fixed interest assets in the Balanced and Conservative strategies by 10.6% in favour of investments in infrastructure and property.
Infrastructure and property are expected to provide income combined with growth prospects despite a rising interest rate environment in the medium term. Although STC has reduced the interest rate risk in the Balanced and Conservative strategies, infrastructure and property both involve their own risks, one of which is illiquidity. Unlike equities or bonds, property and infrastructure investments cannot be bought or sold quickly. The Balanced and Conservative strategies contain a relatively small share of the Fund's unlisted assets. STC is aware of the liquidity implications of holding unlisted assets, and manages liquidity risk at the Fund level.
The asset allocation changes to the Balanced and Conservative Strategies do not adversely affect their risk and return profiles (Standard Risk Measures) over their respective time horizons.
Introduction of ranges for the Balanced and Conservative strategies
In addition to changing the asset allocation of the Balanced and Conservative strategies, STC has implemented dynamic asset allocation (DAA) ranges for the two strategies. This change means that the allocation to liquid defensive asset classes (fixed interest and cash) and liquid growth asset classes (essentially bonds and equities) can be altered relative to their strategic asset allocation weighting. This allows STC to respond to medium-term relative valuation opportunities, and protect against shorter-term market risks.
STC has also reviewed and made minor changes to the existing ranges for the Growth Strategy.
The dynamic asset allocations for the Growth, Balanced and Conservative strategies can vary within the following bands:
| Liquid growth % | Alternatives % | Liquid defensives % | |
|---|---|---|---|
| Growth | 38.0-70.0 | 24.5-40.5 | 10.0-29.5 |
| Balanced | 28.0-48.0 | 25.6-35.6 | 21.4-41.4 |
| Conservative | 12.5-27.5 | 22.8-32.8 | 44.7-59.7 |
STC does not expect that using the DAA ranges for the Balanced and Conservative strategies will change the strategies' overall risk and return profiles. The ranges were introduced to enhance and protect the strategies, given that the investment environment is likely to be challenging for these strategies over the next three to five years.
More information
The SASS Fact Sheet 15 Choosing an Investment Strategy contains more information about these changes. If you have any questions or would like more information about these changes, please contact a State Super Financial Services (SSFS) financial adviser on 1800 620 305.