Rethinking asset allocation

Investors and fund managers are having to rethink asset allocation because international share markets are moving in tandem at present.

MFS Financial Services vice president and global investment specialist Mike Cantara told an ING roadshow in Auckland yesterday that the markets were "pretty highly correlated" at present.

He said correlation was running at about 87% compared to the historical average of 57%.

He says markets tend to be correlated during periods of economic shocks, such as the oil crisis in the 1970s and the Russian debt default.

MFS's approach in this environment is to tackle their investment decision making from a sector, as opposed to a regional basis.

"(Because of this) tremendous increase in correlation sectors are becoming much more important determinants of returns," Cantara says.

"We need to be looking for the best companies in the sectors."

Currently MFS's international share portfolio is overweight to the raw materials, liesure (which includes media) and healthcare sectors.

Cantara says investors should not use this correlation event to say they don't need to invest outside of their home market.

Rather they need to look for the best companies in each sector.

Cantara says that although sector issues have become much more important in the decision making process, fund managers like MFS can invest in just a few sectors, rather it has to find the best companies in all the sectors.

He says this correlation event is making some of the bigger pension funds and institutional investors rethink their asset allocation process.

Instead of saying they will invest a certain percent of their funds various countries they are making just one allocation to international equities.

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