Alternatives do not offer diversification: Schroders

Only equity and debt are asset classes

By Wouter Klijn
Tue 07 Sep 2010

Private equity and hedge funds do not provide diversification in portfolios, Schroders says.

Alternatives, including private equity and hedge funds, are not separate asset classes and fund managers should be aware that investing in these assets does not provide diversification in portfolios, according to Schroders Australia chief executive Greg Cooper.

"There are two asset classes - debt and equity. Everything is some form of these asset classes," Cooper said at the annual Australian Super Investment Conference on the Gold Coast.

Cooper argued that although there are individual fund managers who might have produced good results, on aggregate, managers who are classified as alternative generate results that are similar to either equity or debt markets.

"Alternatives have been a fantastic way of beating up the aggregate fee take, but they haven't done a lot for the aggregate risk and return outcomes for most funds," Cooper said.

Although diversification is an important method of reducing risk, investment managers should better analyse the underlying assets they are investing in, Cooper said.

"A lot of diversification what the industry talks about is not real diversification," he said.

"What you want is economic diversification of the underlying cashflows."

"Things like private equity are not a diversifying asset class - it is equity, it has got equity in its name, it is just leveraged equity. It doesn't give you any diversification whatsoever," Cooper said.

Without this analysis it is impossible to understand how it affects the overall risk in a portfolio, he said.

"You could put all of your money into cash, which would be a really safe portfolio, but it would not be diversified at all," he said.

Go to today's InvestorDaily news

More stories by this author