Towers Watson Urges Investors to Reassess Equity Portfolios

  Towers Watson Urges Investors to Reassess Equity Portfolios

Business Wire

NEW YORK -- February 13, 2014

Institutional investors should revisit their approach to constructing equity
portfolios in order to take advantage of innovations in the industry,
according to an article in global professional services company Towers
Watson’s (NYSE, NASDAQ: TW)  new publication: Equity Investing: Insights Into
a Better Portfolio. The article notes that while investors have been
diversifying away from equities in recent years, equity risk premiums remain
an important driver of returns.

According to the publication, the building blocks of equity portfolios have
evolved beyond market cap-weighted passive equity and active management. Smart
beta is now a third pillar that targets systematic factors and nonmarket cap
stock weighting or thematic investment opportunities in order to capture
particular premiums, typically at a very low cost.

“Developments in equity markets and the industry have added complexity and
breadth, in terms of available products and portfolio construction tools,”
said Jim MacLachlan, Towers Watson’s global head of equity manager research.
“It is no longer sufficient to have an allocation to bulk beta and one or two
active managers to construct an equity portfolio. The onus is now firmly on
asset owners to develop their own portfolio construction skills or delegate
this task to third parties.”

Asset owners must be adept at manager selection, as well as portfolio
construction, in order 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 that cannot
be replicated more cheaply elsewhere using smart beta. Asset owners should
introduce new channels for risk and reward, for instance, through the
implementation of a long/short portfolio alongside the long-only portfolio, or
through more activist strategies.

“We are open-minded about where to look, but often the best specialist equity
managers are found in boutiques established to provide greater focus,” said
MacLachlan. “In some cases, they may be managing money for high-net-worth
individuals or running hedge funds. Often, the mindset or skill set of these
investors is different. For example, high-net-worth managers tend to think in
terms of absolute return rather than relative to market indices.”

Investors targeting high levels of expected excess returns through active
management may want to consider amplifying niche strategies through highly
concentrated (10 to 20 stock) mandates within an equity portfolio, comprised
only of the active manager’s best ideas. Studies have shown that portfolio
managers often add value in their high-conviction stock picks but destroy
value with the unintended underweight positions in the portfolio. Having more
concentrated portfolios with assets focused in the manager’s
highest-conviction ideas should offset unintended underweight positions and
lead to better outcomes.

“In a highly competitive world, we believe asset owners should simplify their
strategy (for example, go passive), or raise their game in order to deal with
this complexity and benefit from it,” said MacLachlan. “While 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. Asset owners should determine what
level of complexity is appropriate, given their requirements and their
governance levels.”

The new publication provides practical insights into equity portfolio
construction, manager selection and manager monitoring. It includes articles

  *Best-in-class equity structure. What are best practices when considering
    equity portfolios?
  *Using smart beta in equities. Examining their rationale and their role in
    an equity portfolio
  *Assessing investment skill in equity managers. As well as the perils of
    assuming past performance is indicative of future performance
  *Quantitative investing: Will quants strike back? Why quants still have a
    role to play
  *Concentrated equity products. Why Towers Watson generally prefers them
  *Understanding emerging-market equity. How to best access the expected
    growth in these markets

Towers Watson Investment is focused on creating financial value for the
world’s leading institutional investors through its expertise in risk
assessment, strategic asset allocation, fiduciary management and investment
manager selection. Towers Watson’s Investment business has around 800
associates worldwide, assets under advisory of over US$2 trillion and
approximately US$60 billion of assets under management.

About Towers Watson

Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services
company that helps organizations improve performance through effective people,
risk and financial management. The company offers consulting, technology and
solutions in the areas of benefits, talent management, rewards, and risk and
capital management. Towers Watson has more than 14,000 associates around the
world and is located on the web at


Towers Watson
Ed Emerman, +1 609-275-5162
Binoli Savani, +1 703-258-7648
Press spacebar to pause and continue. Press esc to stop.