Speaking in Sydney last week, Atrium Investment Management chief executive Alex Hone bemoaned the lack of genuine diversification within investment portfolios.
"Everyone talks about diversification, but people don’t actually understand it," Mr Hone said.
The average industry fund is somewhere between 85 per cent and 90 per cent correlated with the equity market, he said.
"But it’s actually worse than that. [Those portfolios] might have a slightly lower correlation during good times, but when markets capitulate that correlation gets closer to one," Mr Hone said.
Atrium Investment Management began managing money for a core group of clients who were "absolutely devastated" in the aftermath of the global financial crisis.
According to Atrium chairman Chris Cuffe, the investment team has been purpose-built to "eschew a herd mentality" with a focus on outcomes rather than benchmarks.
"I believe Atrium is a prime example of a new breed of 'true' active investors," Mr Cuffe said.
Mr Hone said there is currently a lot of talk in the industry about 'outcomes-based' investing at the moment.
"But ultimately it’s just not possible given the constraints that they build their portfolios around to actually achieve what we’re talking about," he said.
Furthermore, there is not enough onus on investment managers to "actually do what they're paid for", Mr Hone said.
"Just look at Australian equity managers. You’ve got hundreds of them, but the diversity of investment returns among those guys is extraordinarily small," he said.
"There’s got to be more room for investment guys to have a fundamental process.
"I want to invest in things with a view that it’s going to generate an absolute return. And I think the industry needs more of that across the board," Mr Hone said.
Almost all of the larger investment managers have started to set up absolute return funds as an "addendum" to how they manage money, he said.
"Pretty much every large fund manager around town is now starting to come out with this as a cornerstone thing.
"Now some of those might work, some of those might not.
"You’ve got to have [the right] cultural elements there. It comes down to how well they pick the team," Mr Hone said.
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