No more 60/40 portfolio

PHOTO: No more 60/40 portfolio

Professional investors in Asia are adopting new investment strategies as they feel that conventional methods no longer work today, two surveys have found.

In a poll by asset management firm Natixis, six in 10 of the respondents, all institutional investors, said that the traditional way of building a portfolio is no longer the best way to pursue returns and manage risk.

In the traditional method, professional investors aim for a portfolio that is 60 per cent made up of equity investments and 40 per cent fixed income assets.

But now, close to 70 per cent of the 120 institutional investors polled in Asia said they must replace this conventional technique with new approaches in order to achieve results.

For example, four in five said they have changed their approach to risk management in the past five years, and almost a third added that their portfolio allocation to alternative assets is one of their highest priorities over the next 12 months.

These include assets such as hedge funds, private equity or venture capital.

Natixis' executive managing director for Asia, Mr Kinji Kato, said real estate is another popular alternative asset among Asian investors today.

"We have been seeing more client interest in alternatives such as real estate because interest rates are very low now, so real estate could provide a good income source."

Similar results were found in a survey of 27 institutional investment firms in Asia by asset manager Fidelity Worldwide Investment, with respondents saying that they are turning to a wider range of assets as traditional investments such as cash and government bonds have fallen to historic lows.

In their poll, 65 per cent of the respondents reported that they suffered a decline in their returns in the past five years.

As a result, 56 per cent said they expect to increase their investment in European and United States bonds in the next five years, while 44 per cent plan to raise their exposure to emerging market bonds.

Four in 10 added that they want to invest more in equities with high dividend yields too.

"Investors are reassessing their strategies as it becomes clear the world economy is in the midst of a fundamental restructuring," said Mr Nicholas Wong, Fidelity's South-east Asia head of institutional business development.

"In this environment, flexible fixed income portfolios, quality-focused equity dividend portfolios and commercial real estate portfolios can offer greater yields without necessarily taking on significantly higher risk."

The Asian institutional investors surveyed by Natixis were also concerned about the correlation in prices between different asset classes, with half of them saying that traditional assets are too highly correlated to provide distinctive sources of returns.

When the market value of different asset classes, say stocks and bonds, are correlated - they move up and down in tandem with each other - it also increases the risk to the investor as a loss in his stock holdings would not be mitigated by a potential profit from the bonds he owns.

This looks to be a growing problem as less than a third of the respondents said that they have had above average success at constructing portfolios that reduce correlation among assets in the past five years.

Not surprisingly, almost all of them - 91 per cent - said increasing allocations to non-correlated assets is an effective way to reduce portfolio risk.

A third added that paying attention to correlations between asset classes is a top investment priority in the next 12 months.