Investment firms are spending too much time choosing individual investments and not enough time on asset allocation, and their portfolio returns are suffering as a result, according to Claymore Investments president and CEO Som Seif.

Speaking at the Trade Tech Canada equity-trading summit in Toronto on Wednesday, Seif argued that portfolio managers attempting to beat market performance with active investing strategies are increasing their risk and often hampering returns.

He pointed to statistics showing that the average active fund underperforms the market by 2.5% per year over five years. Furthermore, less than 10% of active fund managers outperform the index benchmark, Seif said.

He said passive investing, or indexing, has become a significantly more important strategy among institutional investors, and is growing in popularity among retail investors.

“Many of the biggest institutions in the world are moving towards the index approach,” Seif said.

He pointed to the massive growth in popularity of exchange-traded funds, which have become the most heavily traded securities worldwide. In the last few months, trading of ETFs has comprised 40% of all trading activity in the U.S., and 10% in Canada.

The benefits of ETFs, including diversification, low costs, transparency and liquidity, are continuing to attract investors around the world, Seif said.

“We’re seeing significant utilization of ETFs as a main trading vehicle, as opposed to just individual securities,” he said.

Worldwide, ETFs hold assets worth US$800 billion, according to Seif, and that number is expected to grow to US$2 trillion by 2011.

Adopting ETFs as part of a portfolio simplifies the management process and allows managers to concentrate on appropriately weighting asset classes rather than assessing specific companies, Seif said.

By effectively diversifying a portfolio and adding exposure to such classes as global equities, real estate, emerging markets and commodities, Seif showed that fund managers could effectively boost returns and reduce risk.

While correlation among global equities has risen dramatically in recent years due to globalization, Seif said this is no reason to scrap diversification strategies. He said correlation between various asset classes has not changed from historic levels, and proper diversification among the classes still proves to boost the return to risk ratio of a portfolio.

“The key is, these correlations are still low,” he said.

Seif warned that a successful diversified portfolio requires disciplined rebalancing on an annual or semi-annual basis.

“You never want to buy a security and hold it for 20 years. You always want to have disciplined rebalancing,” he said.

IE