The following statement was issued by a local pension fund manager who, like many similar funds, face rising obligations with lower expected returns on investment...quite the conundrum indeed.
But the following by way of solution is not wise at all:
"He also argues that the program actually is lowering its investment risk because diversification into new asset classes reduces the volatility of the fund while augmenting returns. That's based on past performance at the nation's university endowment funds, after which he's patterned his approach, he says."
Diversification does reduce volatility within a portfolio, but does not reduce systemic volatility throughout asset classes like we just experienced. It is also "unclear" wether volatility is related to returns at all. But even if that were true, there is no reason to think a portfolio that removes MORE risk will DEFINITIVELY generate higher returns simply by entering into other asset categories. And I submit the "past performance" from other universities endowment funds will refute these statements. Unfortunately, it sounds as if this official has a misguided faith in the modern portfolio theory of investment("portable alpha" and other such marketing slogans)