Investment portfolios of the future are likely to be more actively managed on many fronts, according to Russell Investments.
Although many investors use active managers for security selection, their asset allocation moves little from predetermined levels.
"What we found during the financial crisis is that set and forget is unacceptable. Our clients expected us to do something," Russell Investments Asia-Pacific chief executive Alan Schoenheimer said on Friday.
The new way of constructing portfolios will have a much greater level of activity, Schoenheimer said at the Russell Australian Investment Summit 2012.
It will have a greater diversification by including more asset classes than in the past.
Apart from equity and fixed income, portfolios will also include real assets (physical assets, including gold, land or patents), opportunistic investments and alpha driven strategies, including hedge fund-style trading strategies.
"If you want diversification, we've got to increase the hunt for more uncorrelated assets, because all of the traditional ones are much more highly correlated," Schoenheimer said.
"You can understand why: information whizzes around the world much more quickly."
The allocation between the different asset classes will also be more frequently adjusted, he said.
"You can expect the portfolio of the future to have more active asset allocations as we try to cope, respond and try to anticipate some of the things that come down the pipeline," he said.
"That doesn't mean it will be knee-jerk managed, [but] what it does mean is that it won't be set and forget."
The emphasis on a more hands-on management of the portfolio does not mean there is no room for passive investments.
"There will be both active and passive slices in the pie, because we are going to have to manage the total cost of this portfolio," Schoenheimer said.
"[But] that mix of active and passive, the mix itself, could be active.
"So, for example, this year we have 30 per cent passive and next year it could be 10 per cent, because the outlook for passive management becomes less encouraging."
Schoenheim also expected to see more active currency hedging strategies.
"The Australian dollar can drop 2 cents in a day and 10 cents in a month; you can't just say to people: 'Oh well, it will come back.' No, you need to have to take positions and managed that actively and responsibly," he said.
And finally, risk needs to be more actively monitored and managed - not just investment risk, but also operational risk and reputation risk, he said.
"When Lehman hit, everybody was scurrying around, saying: 'What was my exposure to Lehman Brothers?'"
"Do I have their shares, do I own their bonds, do I have trades with them, are they my counterparty? People didn't know.
"But in the last three or four years the industry has worked feverishly and when Barclays hit the screens a couple of weeks ago, people could press a few buttons and know how many shares of Barclays do they hold, how many Barclay bonds do I hold and is Barclays my counterparty."
