GERMANY - Only 19% of institutional investors have a broad enough diversification across asset classes to mitigate risks, according to a risk management study commissioned by Union Investment.
In a survey of more than 80 institutional investors - including banks, pension funds, insurance companies and charitable foundations - the WHU-Otto Beisheim School of Management found that 27% of German investors were using no more than one or two asset classes in their portfolios, while 35% used three asset classes and 17% used four.
Union said only 19% of investors had a "very well-diversified portfolio", comprising five or six asset classes.
Professor Lutz Johanning from the Otto Beisheim School of Management and co-author of the study said he was surprised to find some investors seemed unaware of the "modest extent" of their diversification.
He said the survey suggested investors were relying more on secondary diversification strategies - across regions, for example - through stock picking or by combining different investment strategies.
"Compared with asset classes, which constitute the most effective form of diversification, these secondary strategies do not have as great a diversification impact on the risk/return profile of the overall portfolio," Johanning said.
Based on real indices with a 20-year data history, Johanning concluded that a diversification across asset classes and markets could reduce portfolio risk by a factor of five compared with highly concentrated portfolios.
However, Alexander Schindler, a member of the board of managing directors at Union, said diversification did not protect investors from market downturns that affected all asset classes and stressed the need for active portfolio management to ensure overall risk mitigation.
But both Johanning and Schindler agreed diversification was an important and effective risk management tool, even during the crisis.