Asset owners are faced with a number of external drivers, which may have important consequences for their asset allocation. Among these, low central bank rates, low discount rates/higher liabilities, lower expected returns across many asset classes, and potentially important downside risks may be the most influential. Moreover, despite concerns about potentially full valuations for listed equities following recent strong performance, asset owners still typically rely on this asset class to provide the bulk of return generation, given the greater scalability and relatively lower cost of access.
This paper will demonstrate the potential investment efficiency improvement to the equity component of a traditional policy benchmark of 60% market-cap-weighted equities and 40% value-weighted fixed income. We explore how the risk-adjusted return characteristics of various combinations of non-market-cap-weighted and thematic equity indices might provide a more balanced exposure to listed equities. The alternatives to market-cap-weighted equity indices we considered include: a multi-factor quality, value, and momentum index; equal-weighted indices; low volatility and minimum volatility indices; dividend indices; listed private equity; listed infrastructure; and listed real estate indices.
In upcoming research papers, we will explore differentiation opportunities versus the traditional fixed income policy benchmark and index-based approaches to access alternative strategies like volatility, carry, and commodities.