Comeback time for 70-30 strategies

UniSuper investment chief John Pearce says he is surprised at how quickly the equity markets have become comfortable with the no-recession scenario which has become the base case now.

"While central banks are closer to the end of their tightening cycle It feels to me that the equity markets are still a little bit ahead of themselves," he says. He expects volatility to continue as rates rise further.

According to Pearce, although there are some scattered signs around the world that inflation has peaked, there is little evidence that we are well and truly on the way to two per cent. Inflation is still printing at eight, nine and ten per cent in Europe and the US, with Australia printing at seven per cent.

"In some countries, inflation is heading in the right direction, but we are still seeing very high numbers, So, there's certainly no reason to start popping the champagne yet."

The investment chief of Australia's fifth largest super fund disagrees with reports that a 70-30 portfolio - mixing growth and defensive assets - is dead and that investors should look at portfolio construction differently.

"It's just wrong thinking. The balanced option has long been a mainstay of funds management.  The simultaneous selloff in bonds and stocks last year resulted in negative returns, but now that we can earn a decent yield on bonds, I'm pretty comfortable with a balanced option."

Pearce is arguably the most hands-on investment chief in the industry. More than 70 per cent of UniSuper's assets are managed in-house.

And he is a big believer in staying the course. He has always been against positioning a portfolio for geopolitical events.

"We don't change the asset allocation unless there is a fundamental shift in the market over the long term. You've now got a situation where truly defensive assets such as bonds provide a higher level of income as they pay a decent yield," he adds.

"I think it's going to be a much more positive environment for balanced options than it has been for the last five or ten years where yields on fixed interest securities were crunched because of financial repression."

In Australia, the typical balanced fund has between 70 to 75 per cent exposure to risky assets and 25 to 30 per cent exposure to defensive assets.

To Pearce, the end of financial repression is a major shift as investors can achieve solid returns while taking less risk.

"Negative interest rates were a silly idea and it's good to see that even the Bank of Japan is moving away from yield curve control.

As for the Treasurer's push to get super funds to shore up the housing supply and help boost affordability, Pearce has yet to see a formal plan or model.

Jim Chalmers recently struck a national housing accord with super funds to shore up the housing supply and help boost affordability.

To date, UniSuper hasn't invested in affordable housing.

"We appreciate that housing is a significant challenge facing many Australians and we're pleased to play a constructive role. We'll consider any investment on a case-by-case basis," Pearce says.

"Put a firm or reasonably firm proposal on the table. Tell us what the deal looks like. And we'll take it from there as long as it's in our members' best financial interest."

"At the end of the day, we look at the economics and the financials first. If it makes sense from a financial perspective, and it benefits society, that's the perfect outcome."