Mercer: Portfolio management will change more in next 5 years than in previous 30

22 April 2008

Mercer is excited about the future of portfolio management. On March 21, the LA office of Mercer Investment Consulting gave a presentation to the Arizona State Retirement System called “Investment Industry Trends: Implications for ASRS”. Amongst the discussion of equity markets and interest rates, you’ll find this interesting passage:

“New approaches to addressing the balance between desire for return and the tolerance for risk will be developed.

“It would appear that some investors will go back to making money the old fashioned way-generally earning it with traditional investments in traditional structures.

“There will be room for innovation, in fact, given low expected returns, innovation will be required.

“However, the innovation will not be the result of sophisticated financial engineering but rather in finding new asset classes which have much in common with traditional assets.

“Other investors will adopt a portfolio structure, employing many new sources of beta and different conceptions of sources of alpha with explicit risk budgeting and management techniques.

“A Prediction: For those investors taking the new path, the portfolio structures and management techniques used will be as different in five years as the present portfolio structures and management techniques are from those of thirty years ago.”

A lot has changed in 30 years. Then again, the Time magazine covers from April 1978 do look oddly familiar…