Australian managed funds: investment strategies and property allocation

The Australian managed funds industry is the largest and fastest growing investment sector in Australia. Underpinned by the Australian government’s compulsory superannuation policy, the industry has grown nearly ninefold from A$171 billion in 1988 to A$2.0 trillion in 2012. Even with this phenomenal growth rate, the level of allocation to property asset class in institutional portfolios has remained constant in recent decades, restricted at 10% or lower. While several overseas studies have suggested property allocations within a range of 10-30%, comprehensive empirical evidence on Australian institutional property asset allocation strategies and decision-making process is underdeveloped.<br><br>The focus of this research is to identify the important steps and considerations that influence Australian fund manager’s property allocation decisions, and to suggest ways to improve institutional allocation decisions towards property investments, which traditionally offers stable, income focused returns. <br><br>Research was undertaken using a mixed method (qualitative and quantitative) approach. First an in-depth industry survey was conducted of all major groups in the Australian managed funds industry including superannuation funds, investment managed funds, property funds and asset consultants. The evaluation of the 79 survey respondents indicated that Australian fund manager’s property allocation decision-making process is an interactive, sequential and continuous process involving multiple decision-makers (internal and external) complete with feedback loops. It involves a combination of quantitative analysis (mainly efficient frontier) and qualitative overlay (mainly judgement, or ‘gut-feeling’, and experience). In addition, the research provided evidence that the property allocation decision-making process varies depending on the size and type of managed fund.<br><br>The findings from the survey were developed further through a series of quantitative research analyses. In particular, the performance of the A$302 billion industry superannuation funds' strategic balanced portfolio was compared against ten different investment strategies to examine how property allocation changes with different asset allocation models. The results show that the eleven different asset allocation models perform as well as the industry fund conventional Strategic approach and in many instances property allocation is found to be under-allocated on a return optimisation basis. <br><br>For an Australian superannuation balanced fund, the empirical results show that there is scope to increase the property allocation level from its current 10% to 26%. Upon excluding unconstrained strategies, the recommended allocation to property for industry funds is 17% (12% direct and 5% listed). This high allocation is backed by improved risk-adjusted return performance. <br><br>This research contributes to both practical and academic fields as it offers a methodological approach to how institutional allocation to property assets can be improved. The conceptual frameworks developed from the survey will enhance academic theory in the area of property allocation decision-making. The eleven different asset allocation models developed 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. The research contributes to the transfer of broader finance and investment market theories and practice to the property discipline and so provides flow on support to the continued growth of the Australian property market.<br><br>