Watson Wyatt's annual Manager Investment Performance seminar is always a useful way for Hong Kong's institutional investor and fund management community to get a feel for what investment consultants are thinking.

This year the theme of complexity stood out.

Former Invesco portfolio manager Peter Ryan-Kane outlines the consultant's view that Asian institutions must now diversify investments across all sorts of asset classes in order to reduce risk and improve returns - a theme that many fund managers have taken up in recent years, but one that hasn't seeped into the broad client community in Hong Kong or Asia ex-Japan.

And Naomi Denning, the firm's regional head of investment consulting, says the concept of multi-manager solutions and open architecture in retirement schemes, so prevalent in the West, was now becoming a major theme in Hong Kong. Institutions would benefit by considering such schemes, provided they also understood the risks, she says.

(For a detailed look at both institutional manager-of-managers in Asia as well as the introduction of open architecture to MPF, see the February/March edition of AsianInvestor magazine, available at the end of this week.)

Watson Wyatt also provided a glance at its MIP survey results for 2004. Median fund manager performance for a typical balanced fund (70% equities, 30% bonds) offered to Hong Kong clients was positive 14.9%, the second year of good results after the three dreadful years of 2000-02.

On a rolling three-year basis, every fund management house surveyed outperformed salary inflation in the 2002-04 period. With a median Sharpe ratio of 0.76 among those surveyed, three fund houses did best on a risk-adjusted basis: Credit Agricole Asset Management, Fidelity Investments and Baring Asset Management.

The consultants emphasized that this result only reflected performance, but as they pointed out in a number of presentations, past performance is a poor indicator of future performance; when it comes to choosing and monitoring fund managers, there's rather a lot more to it.

Ryan-Kane's opening presentation provided most of the intellectual firepower. He noted that investors feel the pain of the downside more keenly than the gains of the upside. As a result of two good consecutive years, therefore, Hong Kong investors haven't done much about changing their portfolios - they're still in structures laid out before the 2000 downturn.

He worries that some clients and investment managers may have grown complacent given the past year's very low volatility. He believes that the longer-term trend of volatility hasn't actually changed; in fact it tends to be consistent, even as actual performance numbers leap up and down.

This situation persists in part because, he admits, consultants such as Watson Wyatt haven't pushed it, but also because clients in Asia are often more cautious than Western counterparts.

Although the model of an efficient frontier between risk and return still seems to hold over the medium run, it is more clear that without a more diversified portfolio, it becomes hard to shift along that frontier with any accuracy. For example, if your pension fund only holds bonds and equities, then most of your risk is in the equities component; moving a balanced fund from 60% equities to 40% equities isn't going to have a major impact on your risk/return profile.

But spreading your bets among all sorts of asset classes and strategies can address new kinds of situations. You can adjust your exposure to market return (beta), or to manager skill (alpha) or to the credit environment. These things all add up to a total risk profile. Investors need to broaden their exposures to include things like corporate bonds, CDOs, property, currency overlay and commodities.

None of this is news. The move to passive/active core satellite managers has guided the industry this way since the Asian financial crisis. Fund houses have been trying to react to the advent of boutique absolute-return players and other alternative managers for several years, and traditional firms - particularly those who tend to shadow indices - have seen margins squeezed.

But for many clients, hearing it from an investment consultant may count for more.