(March 11, 2013) – It’s often called the only free lunch in investing: diversification.
Despite this oft-repeated cliché (or time-tested bit of wisdom), Schroders research has found that United Kingdom’s 250 largest companies have, on average, 79% of their defined contribution (DC) portfolios allocated to equities.
The asset management firm’s report looks specifically at firms listed on the FTSE 100 and FTSE 250 indexes, and figures refer to the default allocations for accumulations stages. The report revealed that diversification was less widespread than some of Schroders top experts had expected.
“Surprisingly the average DC Default strategy of a FTSE 100 or a FTSE 250 company today appears not to have diversified away substantially from pure equity exposure,” said Stephen Bowles, head of DC, in a statement. “This indicates that trustees have hugely different opinions as to how they believe their investment strategies can best be achieved. Alternatives account for just 11% of an average portfolio and therefore this does throw into doubt the widespread belief that diversification is already the ‘new normal’ in DC.”
For the FTSE 100 companies-the London Stock Exchange’s 100 largest listed firms by market capitalization-Schroders found that global equities comprised nearly have of the average portfolio (47%), followed by UK equities at 27.5%. Fixed income allocations averaged at just 10%, while the balance of the portfolio (15.5%) was split between cash, real estate, hedge/absolute return funds, commodities, and other asset classes.
DC portfolios belonging to FTSE 250 firms were, on average, even more weighted to equities, Schroders found. Global and UK stocks represented 86% the typical portfolio, with the remaining 14% of assets split evenly between fixed income and alternative.
Bowles did remark that the research had found a wide divergence among DC schemes’ default asset allocations, but concluded, “it is clear that many of the employees of the UK’s largest employers have no exposure to a wide range of alternative asset classes.”