Famed economist and Nobel Prize winner Harry Markowitz called diversification “the only free lunch in finance.” The thought is that by diversifying, an investor gets the benefit of reduced risk while sacrificing little in expected returns over the long run. Diversification is a technique that reduces risk by allocating investments in various different asset classes. Diversified portfolios should (in theory) provide a ‘smoother’ return without the large highs and lows i.e. volatility, associated with equities. It aims to maximise returns by investing in different assets that would each react differently to the same event. Although it does not guarantee against loss, diversification is the most important component of reaching long-term financial goals while minimising risk. Remember, however, that no matter how diversified your fund, risk can never be eliminated completely.
The rise in Alternative Assets
For many years pension funds have diversified portfolios by holding equities and bonds. For the most part, these two types of investments behave differently, for example; bonds traditionally offer some protection when there is an equity sell-off. However within the last decade pension funds can now access a new asset class, alternative assets as another tool for driving portfolio returns and increasing diversification.
Alternative investment is a term for any investment that does not fall into the traditional equity or bond category. It includes relatively easy to understand assets such as commodities (gold, oil, aluminium etc.) and real assets, such as property, forestry and infrastructure. It also covers more complex unconventional strategies such as hedge funds (or absolute return funds) and private equity funds. The main reason to invest in alternative assets is diversification i.e. to seek an alternative source of return, ideally a source of return that has a low correlation with the return from equities.
In CERS we have increased our allocation to alternative assets over the last number of years. Members have exposure to alternative assets by investing in the Default strategy. The CERS Multi Asset Fund is a highly diversified balanced fund and members can also invest directly in the CERS Alternative Asset Fund.
John Geraghty, Pension Consultant, Construction Executive Retirement Services (CERS)
Planning for the Future
As in life, there are many variables and changes. Planning for retirement and protecting your financial future involves forming expectations about income and expenses over the rest of your life, based on present assumptions. As the pension administrator for pension schemes in the construction industry, we have a range of solutions to help you prepare and protect your future investments. Whether you are self-employed, running a large company with multiple staff requirements, looking for life and income protection, we can help.
For more information and to find the right solution for you, contact our team for a no obligation discussion. Our team of financial specialists will put you in touch with the right team member. No obligations, no hidden fees, no jargon – just a straight forward chat to help you secure your present and your future.
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This article provides a summary and is for information purposes only. It does not constitute advice or a recommendation and it does not take into account your knowledge, experience, investment objectives or financial situation. You should always consider taking independent financial advice when reviewing you investment choices