GLOBAL - Long-term investors such as pension funds should diversify rather than protect portfolios against short-term losses, according to a new study by ABN Amro and the London Business School.

Presenting the ABN AMRO Global Investment Returns Yearbook 2007 today, Professors Elroy Dimson, Paul March and Mike Staunton say: "Downside protection hurts performance disproportionately," and it can be counterproductive.

In their research, the three academics looked closely at volatility and investment strategy, arguing that there are opportunities for long-term investors to outperform when the market takes a short-term view on risk.

"Downside protection erodes returns, and by more than risk is reduced," the authors say, adding: "The best way to control risk is to diversify across securities, across assets, and across markets."

Rolf Elgeti, ABN Amro's head of equity strategy, who also contributed to the research, said: "What investors typically ought to do is to take risks that other investors do not want, or are not allowed to take - because these risks tend to offer a higher risk premium."

He added during the yearbook's presentation: "If an investment managers is not allowed to take risk, he will make a serious mis-allocation."

The yearly study, launched in 2000, examines total returns since 1900 for stocks, bonds, cash and foreign exchange in 17 major markets, covering North America, Asia, Europe and Africa.

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