Diversification
Traditionally, pension schemes have invested primarily in equities and bonds only. However, following the equity market volatility of recent years, many schemes are investigating use of alternative asset classes such as:
- active currency management
- commodities
- private equity
- hedge funds
- infrastructure
Diversifying into other asset classes like these can help make the investment strategy more efficient, allowing schemes to increase their expected returns for the same level of risk or reduce risk without sacrificing expected returns. However, many trustees and sponsors are understandably concerned about the potential risks involved.
At LCP we work with our clients to give them a much greater understanding of these unfamiliar assets, and provide an objective opinion of the benefits and drawbacks. This will include advice on relative attractiveness compared to other asset classes and what levels of investment would be appropriate. In addition, we have developed real-time interactive modelling tools which allow trustees and sponsors to see hands-on how diversification can help their particular scheme and giving them confidence to make informed decisions.
The benefits of diversification allow more investment allocations to be considered, which helps increase the probability of meeting the scheme's objectives.
