Schroders CIO calls for asset allocation evolution in wake of credit crunch

Schroders CIO Alan Brown has urged investors to undertake a major rethink of their traditional asset allocation models after the credit crunch exposed the dangers of static portfolio construction.

Speaking on the third anniversary of the credit crunch, Brown believes the developed world is likely to see lower growth than previously experienced, with investment returns modest for the foreseeable future.

He says this will force both retail investors and pension funds to take a more dynamic approach to asset allocation.

“One of the lessons of the credit crunch, and of the last decade to be honest, has been that there is no place for the traditional, static asset allocation,” he says.

“Assets need to be viewed differently. A lot more thought should go into asset allocation. In hindsight, we all should have done better when looking at the valuations of equities at the end of 1999.

“Today, look at the yields on government bonds for example. Is now a good time to have government bond exposure on a longer term view?”

Brown has also urged investors not to underestimate the importance of the world’s growth engines of the emerging markets.

“Emerging markets is obviously strategically very important. I am not advocating investors go and load up on emerging markets now, but on a medium-term view there is a very strong argument for more exposure,” he says.

“I am not just talking about emerging markets equities as emerging market currencies could also have a big part to play in asset allocation.”

His comments are backed up by the huge diversity of funds which have topped the performance tables over the last three years since the start of the credit crunch in August 2007.

Emerging market debt funds have started to appear on some wealth managers’ radars but advisers who have not yet embraced this asset class would have missed out over the past three years.

The Investec Emerging Markets Debt fund was second over the period, up 84.14%, while vehicles from M&G and Schroders also scored highly.

Advisers who stuck to traditional asset allocation models, focused heavily on UK equities and bonds, will also have missed out on investment opportunities, according to the figures.
GAM Star China Equity and other emerging market equity funds dominated the chart while global bond vehicles were ahead on the fixed income side.

Meanwhile, Asia also came out on top when looking at the comparative performance of major global indices over the period.

India’s Sensex lead the way after climbing from 14,868 points to over 18,000, although it did fall as low as 8,325 during the height of the market panic in March last year.

The Hang Seng also faired better than the more established FTSE and Dow Jones, as it only fell 3.2% compared to drops of 12.8% and 22.1% for the UK and US-based indices.