Diversify portfolios, investment boss warns

Fund managers need to better identify risky assets and invest more in property and infrastructure to avoid being clobbered by another downturn in the financial markets, according to one investment chief.

Russell Clarke, chief investment officer at default KiwiSaver provider Mercer, said there was a lot to be learned from the global financial crisis but many had yet to reflect on it.

"There is almost a sense of everything being right again - but we need to avoid complacency.

"The fact the market has rebounded gives the opportunity to make changes without fire sales of assets."

Sharemarkets around the world have bounced back after hitting lows in March.

But Clarke said the financial crisis had shown multi-asset portfolios were too reliant on investing in shares for growth.

"We've got to go back to basics."

Clarke said investment portfolios needed to become more diversified by investing more in real assets such as property and infrastructure as well as alternative areas like natural resources and commodities.

Property and infrastructure were one way to get closer to an underlying asset rather than go through a listed property trust which could be highly geared or be more about managing the business than the property.

However, with that also came the risk of increased illiquidity and fund managers would need to hold the asset through a cycle.

Infrastructure had been difficult to invest in in the past because it was often owned by Governments but Clarke said high levels of Government debt meant they were now looking more to the private sector to fund the building of roads, hospitals and prisons.

Clarke said property and infrastructure were also a good way to protect against inflation which seemed to be of a higher likelihood now.

At the same time investors needed to better understand and classify the risks in each asset class.

Clarke said fixed-interest investments could no longer be lumped in one category and should be split into sovereign bonds, bonds issued by the Government, and credit, the debt issued by corporates.

"Most people had a mix of credit but there was more risk in fixed-income than what people realised."

Clarke said managed funds needed to increase their exposure to sovereign debt although it should be done over time.

Fund managers have typically identified their assets as either growth or defensive [value] but Clarke said the industry had developed so much those terms were too simplistic.

Clarke said funds needed to get a better balance of risks as opposed to just lowering risks in a knee-jerk reaction to the crisis.

"Asset classes have evolved fairly gradually and somewhat under the radar," he said.

"Unfortunately I think there was a lack of understanding of the complete risk."

Clarke said portfolios needed to do what they promised on the label.