Another approach to asset allocation which has attracted a lot of interest of late is a risk paritybased asset allocation, whereby various asset classes are either levered or de-levered to transform their risk profiles (bonds being levered and equities de-levered). Clarke says that while this approach is quite “elegant”, the introduction of leverage involves new risks. This approach may well be a case of practice not matching theory. Both of these new ways of looking at asset allocation aim to achieve better diversification than the traditional way, since the financial crisis exposed the true correlations between investment types – although it could be argued that this is unlikely to re-occur in our lifetimes.
Within a traditional approach to asset allocation there has also been increasing questioning of the weightings given to developed markets versus emerging markets. On the face of it, it does seem questionable to allocate 10 per cent of a global portfolio to nations which represent 50 per cent of the world’s wealth, particularly when they seem to be growing faster too. Mercer’s global head of investment consulting, Andrew Kirton, said outside last month’s conference that the firm would be rolling out a major piece of work for clients which addresses the traditional biases to developed markets as well as home-country biases. Investing a larger proportion of a portfolio in emerging markets may be easier said than done, however. The listed markets may be thin, volatile and contain more governance risks. Nevertheless, there is no doubt that funds cannot afford to pay them as little attention as they may have have done in the past.