Advisor Blog

Big insurance companies have extensive investment portfolios that are critical to maintaining their financial strength and that are used to support their in-force insurance policies.  Of course, they depend heavily on the investment management expertise of their portfolio managers and they hire some of the best and brightest.  While reviewing one of their reports this week, it was interesting to note how the long-term disciplined investment strategy of one large insurer was described:

• Different asset classes will perform well during different periods and the performance of any asset class during a single period cannot be predicted with reliability.
• A broadly diversified portfolio is essential to help manage portfolio risk.
• Holding high quality fixed income investments allows the portfolio to invest in higher risk assets, including equities.
• Owning Real Estate Investment Trust securities (REITs) adds both return and real diversification to the portfolio.
• Owning higher-risk assets, such as equities, in combination with fixed income, reduces overall portfolio volatility while increasing returns over time - as explained by Modern Portfolio Theory (MPT).

What struck me as particularly interesting about this description of the insurance company's portfolio managment strategy is the similarity to ours.  In fact, most of the above statements can be found in our investment philosophy.  As we often tell prospective clients, this is how large institutional investors structure portfolios.  However, it is very rarely how individual investors or retail "financial advisors" do it.  In fact, I've read a few articles over the past couple of years that claim that MPT is dead.  Hardly.  At least, not among some of the largest investors in the world.