Correlation within various asset classes has increased markedly in recent years and thereby reduced the risk-smoothing benefits of diversification, according to Eduard van Gelderen, CIO at €390bn asset manager APG.
Speaking at Beleggersberaad 2014, the PensioenPro conference for investors, Van Gelderen said diversification was the “only investment belief APG needed to adjust”, following changes in the financial markets.
“For a long period,” he added, “diversification was the only ‘free lunch’ in the financial sector, and one of our seven investment beliefs.”
Van Gelderen attributed the increase in correlation to improvements in technology, which has made transferring assets from one asset class to another much easier.
It has also improved access to all asset classes.
“Ten years ago,” he said, “investors were reluctant to invest in emerging market debt, but nowadays, this is a normal practice.”
But he also warned that the new-found ease with which investors could shift assets worldwide had also increased herd behaviour.
“There is an incredible amount of money looking for returns, and the current is always in the direction of the same investment opportunities,” he said.
Van Gelderen said he was not particularly surprised by the increase in correlation among the various asset classes.
“At the end of the day, all returns are based on economic growth, and this applies to all investments,” he said.
In his opinion, increasing investments in non-listed assets such as infrastructure will fail to deliver the diversification pension funds desire, “as these investments are also GDP-driven”.
However, he said there was no reason for APG to shy from less liquid investments.
“For us, as a large investor, these investments carry the benefit that we can participate immediately,” he said. “Further, we are required to share profits with fewer players.”
Van Gelderen made clear that the “new reality” of increasing correlation and dwindling diversification would not lead to direct changes in APG’s investment policy.