You are the consultant that has been asked to provide advice to VicSuper Fund. The VicSuper Balanced Fund has produced strong returns over the past 12 months, driven by the large exposure to global equities. The global equities allocation is now 30%, and this contrasts to the Strategic Asset Allocation weight of 20%. What is the most suitable course of action to take?[Fill in the blank]

Question

BlackTom AI · Accepted Answer

Because the global equity weight has drifted from the Strategic Asset Allocation (SAA) target of 20% up to 30%, there is an overweight of 10 percentage points that must be addressed to preserve the fund’s intended risk/return profile.

Relevant concepts:
- Strategic Asset Allocation (SAA) defines long‑run target weights to achieve an investor’s risk and return objectives.
- Rebalancing restores the SAA, controlling unintended risk exposures caused by drift.
- Practical rebalancing considers transaction costs and may use tolerance bands, but the fiduciary aim is to return to SAA rather than to chase momentum.

Step‑by‑step reasoning and calculation:
1. Let the total portfolio value be P (for clarity, set P = $100).
2. Current global equities = 30% of P = $30. Target global equities = 20% of P = $20.
3. Excess = $30 − $20 = $10 (i.e., 10 percentage points of the total portfolio).
4. To reach the SAA you should sell the excess $10 in global equities. That sale represents $10 / $30 = 33.33% of the current global equity holdings.
5. The proceeds ($10) should be re‑distributed across the other asset classes according to the SAA weights (not parked in cash or pushed solely to one asset class) so the total portfolio returns to its planned mix.

Why answer (b) is correct:
- It directly restores the fund to its SAA, removing the unintended concentration and returning the overall portfolio to the designed risk profile. This is the standard fiduciary and risk-management response to allocation drift.

Why the other options are incorrect:
- (a) Buying more global equities to chase momentum increases concentration risk and violates the SAA discipline.
- (c) Holding the excess in cash reduces expected return and still departs from the SAA; cash is not the SAA destination.
- (d) Moving proceeds exclusively into fixed interest ignores the SAA’s prescribed split among asset classes.
- (e) Doing nothing accepts an unintended, larger equity risk simply to avoid transaction costs; short‑term cost savings do not justify persistent deviation from the chosen risk profile.

Conclusion: The appropriate action is to decrease global equities to the 20% target and re‑distribute the proceeds according to the SAA, which matches answer b.

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