GLOBAL - Institutional investors should search existing and new market opportunities to build more diversified portfolios, Towers Watson said.
In the consultant's article ‘Is Diversification Dead?' it said the risk of an equity-focused strategy remained high, particularly amid the ongoing economic uncertainty.
It said institutional investors that have diversified their assets away from developed market equities during the past five to 10 years will have outperformed.
Towers Watson global head of investment Carl Hess said: "Despite recent intermittent, short-lived peaks the equity party really ended as the new millennium began, so a heavy reliance on this asset class would not have been a good strategy since then."
He added: "While moving to a diversified portfolio is a higher governance approach than a simple bond/equity portfolio, we think the effort is worthwhile for almost all institutional asset owners."
The firm said a diverse portfolio and better liability management techniques can improve efficiency by 20% to 40%, compared to a simple bond/equity mix.
Hess said this type of portfolio can be made of beta opportunities, without the need for active management, therefore requiring fewer managers than typically used in a fully active portfolio.
The consultant said many institutional investors still have only a small allocation to emerging markets - with the emerging market weighting only about 10%, for example, in a global equity index.
It urged investors to increase allocations to emerging markets through companies more directly exposed to emerging market growth, in areas including infrastructure or domestic consumption.
Although also Hess said the firm believed emerging market economies would continue to grow strongly, institutional investors face significant complexity and potentially high fees when trying to build a portfolio that captures this long-term trend.
He said they should also recognise the governance implications of following such a strategy.
Hess said alternative betas were strong diversifiers. "What is important with ‘alternative' betas is to focus on those that are genuinely different and genuinely diversifying.
"We would therefore look to exclude, as far as is practical, any beta exposures that we can achieve more cheaply elsewhere in a portfolio. This is of key importance as what we are trying to achieve for our clients is diversification at the right price," he added.
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