Schemes urged to stick with diversification

Date: Tuesday, December 9, 2008
Author: Giovanni Legorano, Professional Pensions.com

PENSION funds abandoning diversification strategies as a response to losses caused by market turmoil could miss investment opportunities, asset managers warn.

The managers - speaking at a Redington Partners asset management roundtable yesterday - pointed out pension funds expected to be less challenged by the recent market events, given their diversified portfolios.

BlackRock managing director Andrew Dyson said pension funds and institutional investors would be making a strategic mistake if they moved away from diversification.

But he explained: "It should be genuine diversification though. In several cases, pension funds had assets in their portfolio, which should have not been there."

Dyson concluded pension funds could miss investment opportunities, if they waited until the end of the upcoming recession to diversify their portfolios.

In particular, he said pension funds should consider investments in the credit space, as it represented a clear source of future returns.

Legal and General Investment Management head of quantitative products Kerrigan Procter agreed and said diversification was a "solid principle".

He said: "While borrowing to buy assets has generally pushed prices down, this did not happen across the board. Pension funds must continue to diversify."

Procter also said several "diversified beta products" - replicators of hedge funds strategies - could be introduced in the future, replacing alpha strategies which disappointed several institutional investors.

However, Standard Life Investments senior strategist Richard Batty said: "Diversification as a model has clearly not worked for risky assets. Pension funds needed to include risky assets in their portfolio in order to increase their sources of yield, but that exposed them to losses."