Report Echoes aiCIO Survey, Urging Investors to Go Global

(May 4, 2011) — Echoing findings from aiCIO‘s Survey of Asset & Geographical Allocations (SAGA) — which showed that investors are good, but far from perfect, at avoiding home-country biases in their portfolios — a recent paper by Hermes Global Equities Advisors has shown that institutional investors must look abroad to increase their returns.

“In the last six years the top 200 pension plans in the US have increased the non-US equity component of their equity exposure from 25% to 40%. This substantial figure demonstrates that the equity benchmark for pensions in the US is increasingly becoming a global equity benchmark,” Hermes’ portfolio manager and founding principal John Chisholm wrote in his latest research paper, entitled: Global Equities: The Most Logical New Core.

Hermes’ findings jibe with aiClO Magazine’s SAGA, included in its March issue, which analyzed how investors avoid home-country biases in their portfolios. The survey revealed that, despite constraints, respondents had, on average, aggressive portfolios of almost 48% equities, 31% fixed-income, and 21% alternatives, not including real assets at 9%. The average return for the past year was 10.5%, with United Kingdom funds recording the highest average of any region. Furthermore, aiCIO‘s study revealed that funds located in smaller markets are more likely to invest outside those markets.

aiCIO’s study showed that with regard to geographical allocation, only 8.3% of respondents say that they are limited by national or local laws, with North America the least restrictive, followed by Europe. With regard to asset allocation, 12.9% of funds surveyed face restrictions in what they can and cannot invest in, with North America being less restrictive than other areas.

“It is our view that by consolidating international and domestic exposure with a global equity manager, institutional investors can achieve a better trade-off between risk and returns by reducing the number of inefficient exposures combined with better opportunities for alpha amplifications,” Hermes’ Chisholm wrote. According to Chisholm, as industries become more and more global, regionally constrained managers may be forced to invest in global themes through sub-optimal holdings.

Investment consultants have witnessed this trend of going global. “There’s been a general trend of being more global among most of our clients…we continue to see people look at their global allocation,” Rogerscasey’s President and CEO Tim Barron told aiCIO. “As a result, we’ve been having a lot of conversations about currency — currency is very important — and currency hedging, as you increase your exposure to non-US securities.”

Hermes’ findings showed that median global equity managers have generated an average of more than 1% of alpha over than their regional counterparts during the last decade. “Global equity strategies have emerged from this as an optimal core equity holding for institutional investors as well as one of the best sources of portable alpha for active managers, and this trend will only increase as the forces of globalisation continue to accelerate in the 21st century,” Chisholm wrote.