Inside Money: To see the investment universe in a grain of sand

Is the foundation of modern investment theory flawed? Photo / Thinkstock

In an earlier Herald column Gareth Morgan's guy Chris Worthington argued the whole risk/return premise, which serves as the foundation of modern investment theory (and practice), was fundamentally flawed.

Random. How now should we construct investment portfolios?
Let's get that dart-chucking chimpanzee on the job - it'll cost peanuts.

If Worthington (or Erik Falkenstein, the bloke whose research the column was based on) is right all that fussing around with asset allocation is an expensive waste of time.

He would find mixed support for such views in the latest Morningstar KiwiSaver performance survey, which tracks a reasonable number of fund managers in the sector.

Morningstar has grouped all the funds in its survey according to their underlying mix of assets as per the traditional risk/return theory.
Over the three years to the end of 2010 the results look topsy-turvy with the average aggressive fund losing almost 0.5 per cent over the period while the average conservative fund gained 4.65 per cent.

However, over the two-year and one-year periods to December 31 last year, the natural order reasserts itself: high risk equals high return once more.

Asset allocators would be pleased at the exact way the Morningstar two- and one-year performance figures fall into line with the theory.

Granted, KiwiSaver funds are but brief moment in time contained in a tiny speck of the giant investment universe whereas Falkenstein is considering the performance of everything in all of financial history.

Even so, Chris Douglas, co-head of Morningstar Research Australasia, might still have a point when he says that "asset allocation... is one of the most important decisions to make when saving for retirement income".