Achieving adequate portfolio diversification is never easy, but current macroeconomic conditions are testing the mettle of even the most experienced investors. Eric Upin, CIO of Menlo, California–based investment firm Makena Capital Management, uses his skills as a practitioner of multiasset, endowment-style investing to help the firm’s clients — endowments, foundations, sovereign wealth funds and family offices — navigate global markets. The 51-year-old Chicago native honed his skills in the same role at Stanford Management Co. and joined Makena in 2009, four years after the investment firm was founded by Michael McCaffery, SMC’s former president and CEO, and two of Upin’s SMC colleagues. All investors want stellar returns, but they’re “often unaware of the true underlying risks,” Upin says. Makena relies on the combined talents of its team to help its investors — which include sovereign wealth funds Abu Dhabi Investment Authority, Australia’s Future Fund and Government of Singapore Investment Corp., according to public sources — rationalize the complexities of asset classes, geographies and regulatory jurisdictions. Upin recently spoke with London Bureau Chief Loch Adamson about the intricacies of global endowment-style investing and the biggest challenges that lie ahead.

What risks are of the greatest concern to global investors?

The No. 1 risk in the world that we see investors wrestling with is the potential impact of central banks’ policy response as they’ve tried to combat the deflationary forces of the financial crisis. We’ve seen unprecedented quantitative easing, fiscal bailouts, direct bond-buying and zero percent interest rates. All of those actions — even though they’ve been undertaken for the greater economic good — may have unintended consequences. We don’t yet know what the side effects are going to be on the value and pricing of assets. The biggest risk is that as normal as everything looks now, those policy responses may have created a mirage, or even a set of mirages, that could dissipate quickly.

How has your approach to diversification evolved over time?

We would argue that there are substantially more investable asset classes and geographies to consider today than there were 20 or 25 years ago, so the level of complexity is much greater. Just in terms of geographies, we now consider a much wider range — and if you’re investing with a 20-year or as much as a 50-year time horizon, how do you determine your China strategy, for example? What does it take to develop a clinical, balanced perspective on investing in the country? What asset classes do you use? Even if you manage to figure that out, how do you approach India or Latin America? In the past, emerging markets constituted perhaps 5 to 7 percent of an institutional portfolio; granularity is now much more important because these allocations can account for as much as 15 to 25 percent.