Institutional investors should revisit their approach to constructing equity portfolios to take advantage of innovations in the industry, according to a report by Towers Watson.
While investors have been diversifying away from equities in recent years, equity risk premiums remain an important driver of returns. Towers Watson stresses that the essential building blocks of an equity portfolio remain market capitalization-weighted passive equity and active management.
But the market has changed significantly in the past 15 years, including two "significant market bubbles/cycles with the dot-com bust and the global financial crisis," the report said. "As a result, investors' understanding of behavioral biases has evolved and we have been reminded of the importance of macroeconomic, social and political issues."
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