Articles

Challenging Times Demand New Array of Investment Options

Victoria Collins, Executive Vice President, The Keller Group Investment Management

August 1, 2009

As investors, we've been nurtured on the typical asset allocation model - stocks, bonds and cash - to reduce risk and provide returns. Today's changing economic world calls for a fresh look at traditional thinking.

Looking at the evolving financial landscape, we see three headwinds that will most likely impact equity returns over the next five plus years.

• We expect economic growth coming out of this recession to be slower and lower and that equity returns will not be as strong as they have been after prior recessions.
• Higher volatility is here to stay, at least for the foreseeable future.
• Increased correlations among asset classes means that stocks, bonds, international markets are tending to move more in "lock step" than they did previously.

To address these "headwinds", we are taking steps to enhance portfolios by adding additional asset classes, being more tactical than static in changing our allocation and emphasizing diversification across global risk factors not just asset classes.

Our portfolios going forward will be based on the "endowment model". The "endowment model" is not new and some of our clients may find it familiar. Universities, foundations and a relatively small number of ultra high net worth families have had the benefit of this type of investment approach that we now can access through mutual fund format.

Adding alternative investments (e.g. market neutral strategies, private equity, real estate) to the traditional stock and bond portfolio has historically produced reduced risk with comparable or better returns than its benchmarks. By using the mutual fund or sub advisor format to access these investments, we can provide broader diversification, yet have the liquidity and transparency that clients desire.

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