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Diversification “key to investment success in 2009”

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Tobam, a quantitative investment manager formed from the break-up of Lehman Brothers Asset Management, is calculating that beta is the most important investment opportunity in 2009.

Tobam, a quantitative investment manager formed from the break-up of Lehman Brothers Asset Management, is calculating that beta is the most important investment opportunity in 2009.

‘Investors have paid a premium for alpha over the last few years and as they read their investment reports in the coming weeks, they may well be asking themselves what they have been paying for,’ says Tobam president Yves Choueifaty.

‘In 2009 the most important investment opportunities will be beta rather than alpha, so diversification should be at the top of every investor’s must-do list. Markets are incredibly volatile right now and strategies which spread risk cannot possibly be at a disadvantage to concentrated risk-taking.’

The firm’s managing director Michael Gran says: ‘Capturing beta efficiently is often overlooked as a path to superior investment results. There has been a trend towards non-market cap solutions, and one of the more efficient approaches for beta construction is known as anti-benchmark.

‘Anti-benchmark uses a mathematical approach to create the most diversified portfolio. This portfolio does not rely on historic earnings, sales or other valuation criteria to try and predict the future, rather it spreads risk more evenly across all the currently identifiable market risk factors.’

Choueifaty adds: ‘Our research indicates that focusing on efficient beta construction, without making big bets, is a way to achieve higher returns with less risk. Diversification is the strategy which is worth paying attention to at all times.

‘The anti-benchmark strategy has been designed to offer an alternative to using market cap weighted indices as a core equity market exposure, which investors hold to capture the equity risk premium. We believe this risk premium is best captured by holding what investment literature refers to as a well-diversified portfolio.’

Anti-benchmark is designed to be the most diversified portfolio that can be built for a given universe of securities and is, therefore, expected to be the most efficient way to capture the higher returns available from holding equities.

Research indicates that investors spend much of their time seeking new sources of alpha, when in fact their expected returns over time are almost entirely driven by capturing the risk premium of their asset allocation.

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