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Traditional Portfolio Construction Rules No Longer Apply

By Hal M. Bundrick

NEW YORK (MainStreet)--Investment professionals may be losing a bit of their swagger. New research indicates that money managers now fear that the tried-and-true investment principles of the past are outmoded in today's financial markets. These same institutional investors are also wringing their hands over severe market swings, the threat of rising inflation and the challenge of lower yields and weaker returns.


The study, conducted by Natixis Global Asset Management, is based on interviews with 500 institutional investors in 19 countries, collectively managing more than $11.5 trillion in assets.

Most of the investment professionals admitted that traditional investing principles have outlived their usefulness. An overwhelming majority (88%) of U.S. money managers say the old rules of investing no longer apply in today's markets, and that traditional portfolio construction and diversification strategies aren't ideal for most investors. More than 70% of the money managers say that setting asset allocation and taking tactical advantage of market movements is difficult.

"The old road map no longer guides investors, and the new one is being drawn every day," says John T. Hailer, chief executive officer of Natixis Global Asset Management in the Americas and Asia. "They need more tactical help with portfolio construction and asset allocation so they can build stronger, more durable portfolios that can better withstand the cycles."

88% of respondents said that meeting their total return objectives will be difficult and 81% of U.S. money managers admit that individuals saving for retirement will fall short of their goals.


Many of the institutional investors surveyed are exploring new investment strategies and looking to expand investments in global (58%) and emerging market stocks (46%). Most (60%) plan to increase their allocations to alternative investments such as hedge funds, real estate, private equity and commodities, and believe these assets will perform better in 2013 than they did last year.

Asked to project which asset class will offer the best return this year, the top choice was global equities (27%), followed by domestic stocks (19%) and emerging market equities (15%). Investors worldwide are bearish on gold and cash, as more than 80% expect lowering or maintaining their current allocations to each.

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