In its publication released on Friday, Towers Watson said the building blocks of equity portfolios have “evolved beyond market cap-weighted passive equity and active management”.
Towers Watson's head of Australian equity manager research, Ben Griffiths, said asset owners must develop their own portfolio construction skills, or delegate this task to third parties.
The complexity of equity markets and the industry means it is no longer sufficient to use ‘bulk beta’ and one or two active managers to construct a portfolio, the publication said, adding that asset owners must be able to “identify skilled active managers from a universe of many thousands of competing products”.
“A core principle is to make sure active managers are best in class and providing differentiated strategies which cannot be replicated more cheaply elsewhere using smart beta,” it stated.
“Asset owners should introduce new channels for risk and reward, for instance through the implementation of long-short alongside the long-only portfolio, or more activist strategies.”
Mr Griffiths said that often the best specialist equity managers are found in boutiques established to provide greater focus, including those managing funds for high-net-worth individuals or running hedge funds.
“Often the mind-set or skill-set of these investors is different,” said Mr Griffiths.
“For example, high-net-worth managers tend to think in terms of absolute return rather than relative to market indices.”
He added that in the current competitive environment, asset owners need to simplify their strategy by using a passive strategy or “raise their game, in order to deal with this complexity and benefit from it”.
“Whilst there are greater expected rewards from the latter approach, it requires more internal governance and portfolio construction skill from the asset owner and therefore may not be suitable for everyone,” said Mr Griffiths.
“Asset owners should determine what level of complexity is appropriate, given their requirements and their governance levels.”
