Readers of our Monthly Alternatives Briefing and this blog know that a favorite topic of ours is investor behavior, and the negative consequences that often accompany such behavior. We see detrimental signs of short termism and performance chasing everywhere we look. Case in point, a recent Fundfire article entitled “Institutions Question Wisdom of Global Diversification”. The gist of the article follows:
“In the past two months, RVK, NEPC and Fund Evaluation Group (FEG) have all authored white papers that first acknowledge their clients’ growing wariness of diversification before laying out an argument endorsing its virtues.” The article goes on to say that “For an extended period of time, portfolios with a traditional 60/40 allocation to U.S. equity and U.S. fixed income have outperformed many portfolios that include a broader set of asset classes,” according to a June research note from RVK. “In response, many investors have questioned whether reverting to a simple U.S. 60/40 portfolio represents a more optimal long-term strategy.”
The idea that sophisticated institutional investors are even considering throwing in the towel on global diversification to increase what is likely an already pronounced home-country bias, strikes us as a sign that U.S. markets are nearing a top. We definitely side with the consultants cited in the article arguing to stay the course. In times of heightened uncertainty around global growth, lofty valuations (particularly in the U.S.) and the always difficult-to-predict actions of the world’s inept central banks, the last thing investors should do presently is further concentrate their risk exposures or narrow the opportunity set. The promise of diversification was never outperformance in all market environments, but rather, in part to protect against those “unknown unknowns.” We hope the consultants win this fight.