Why Strategic Asset Allocation is Important - and Why We've Reviewed Ours

As most of you will be aware, the real task of a Strategic Asset Allocation is to ensure the chosen strategic mix remains fit for purpose as market structure, valuations, and investor needs evolve—without drifting into short‑termism. That’s exactly why we’ve just completed a comprehensive SAA review of Kernel’s diversified funds.

At a high level, our aim is unchanged: deliver resilient, risk‑adjusted outcomes through full market cycles using a transparent, rules‑based asset mix and a disciplined rebalancing framework. What evolves are the inputs and the implementation: capital market assumptions, concentration risk, regional balance, role of real assets, currency policy, and peer comparability for NZ investors. Think of it as reaffirming the investment compass, not redrawing the map.

Empirically and in practice, the long‑term mix across equities, fixed income, cash, and real assets explains the bulk of return dispersion and variability through time. Tactical tilts may occasionally add value, but they embed timing risk, raise implementation costs, and can undermine client behaviour at precisely the wrong moments. Providers like Vanguard have repeatedly shown that strategic allocations with systematic rebalancing tend to deliver higher consistency and a narrower dispersion of outcomes than tactically managed multi‑asset peers.

Objectives first. Each diversified fund has a clear objective anchored to investor risk capacity and role in a broader plan, which sets the growth/defensive split and the tolerance for tracking error versus broad market betas. The SAA must reflect those objectives before any market view enters the picture.

Forward‑looking assumptions, not forecasts. We use capital market assumptions grounded in yields, valuations, and macro linkages to compare relative risk premia across assets and regions. The point isn’t to predict the next move; it’s to size exposures such that expected returns compensate for the risks taken over rolling horizons.

Diversification that counts. We assess concentration at multiple levels—country, sector, factor, and style—alongside cross‑asset correlations that are sensitive to inflation regimes and policy cycles. The goal is to dampen portfolio path dependency without diluting return potential. In practice, that means a thoughtful global equity allocation, a credible role for non‑domestic exposures, and careful handling of dominant markets and sectors so they remain important but not determinative.

Real assets as a structural sleeve. Listed infrastructure and property bring different cash‑flow characteristics and explicit or implicit inflation pass‑through. Their inclusion is about improving the portfolio’s response surface to inflation surprises and supply‑side shocks, not about making a directional macro bet.

Currency, done intentionally. For NZ‑based clients, currency is a material risk factor. Our approach is selective: hedge where currency volatility doesn’t pay (for example, in defensive sleeves where you want duration and credit to do the work), and leave room for unhedged exposures where the currency acts as a shock absorber or offers diversification benefits. Regional nuances matter; we reflect them in the policy rather than apply a one‑size‑fits‑all setting.

Fixed income that earns its keep. Defensive assets must diversify equity risk and provide reliable ballast. That argues for breadth across high‑quality domestic and global exposures, careful credit and duration posture, and benchmarks that reflect the investable global market rather than a narrow subset. The aim is to enhance resilience, not to chase carry.

Implementation and liquidity. We prefer instruments and building blocks that are liquid, transparent, and low‑cost, enabling clean rebalancing and efficient cashflows. Portfolio design that looks elegant but can’t be traded through rough conditions doesn’t meet the brief.

Peer relevance without herding. We consider how comparable multi‑asset and KiwiSaver peers structure their risk profiles to keep client expectations aligned and conversations simple, but we let our evidence and governance lead the final settings.

SAA isn’t a static spreadsheet - it’s a governance discipline. We run scenario analysis to test the mix under a range of inflation, growth, and policy regimes; stress test concentration and liquidity; and evaluate how incremental adjustments affect total portfolio variance, drawdown characteristics, and recovery paths. We then codify a rebalancing policy that keeps exposures close to targets, trims runaway winners, and adds to laggards - systematically. The result is a portfolio that avoids unintended bets, manages correlation breakdowns more gracefully, and keeps the return drivers diversified.

You’ll see this reflected in three areas. First, global equity balance that avoids excessive dependence on any single market or style while retaining meaningful exposure to enduring innovation themes. Second, a permanent, measured sleeve of listed real assets to enhance inflation resilience. Third, a selective currency policy that reduces uncompensated volatility in defensive assets while preserving diversification potential where it’s most valuable.

Clear role definition. Each fund’s risk budget and behaviour through cycles are easier to explain and to map to client goals, whether they’re accumulating, de‑risking ahead of retirement, or drawing down.

Better diversification where it matters. Reduced concentration and broader sources of return improve the odds of a smoother path, particularly when leadership rotates across regions, sectors, or regimes.

Behavioural support by design. Disciplined rebalancing and intentional currency choices lower noise and help clients stay invested. The best SAA is the one clients can stick with.

Implementation you can trust. Liquidity, transparent building blocks, and a predictable process make portfolio changes and client cashflows straightforward, even in stressed markets.

Strategic asset allocation remains the most reliable lever we have for long‑term outcomes. Reviews like this are like refining the engine that has to run through many different road conditions. For advisers, that means you can spend more time on goals, cashflows, and behaviour, confident the underlying portfolios are doing the heavy lifting, systematically and transparently.