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Global crunch has killed off passive model

Diversification with judgment is the key to building multi-asset portfolios that work, according to Octopus Investments.

Chief investment officer Lothar Mentel says the passive multi-asset model, which aims to smooth out fluctuations in equ- ity markets by diversifying across a range of assets that should have a low correlation, is dead. He says the credit crunch, which prompted a global sell-off of assets with no buyers, has shown the model is incapable of protecting portfolios against financial meltdown. Some multi-assets were also dependent on cheap credit to produce returns, so were hit by a double whammy when the cheap money dried up.

Diversification with judgement differs from the passive model as it recognises that extraordinary events can happen, so multi-managers need to understand what is going on in the world and where markets are likely to head.

This approach has led Mentel to invest in traditional assets that have performed well, such as US bonds, rather than diversify across more exciting private equity, commercial property and hedge funds that were seen as unattractive. He says: “If you do not know what is going on in the world and why, you will not do any better than a tracker fund because the gains and losses you make will cancel each other out. We look around and ask, what does the current environment tell us about where markets are heading?”

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