At its "From Main Street to Wall Street" roundtable lunch Tuesday in New York, Genworth tackled several questions on investment outlook that are impacting investors as the economy continues to rebound.

Tim Knepp, the chief investment officer at Genworth Financial Asset Management, argued that the differences between asset classes over time are simply not that great and diversification won’t save anyone from market downturns.

“In 2008, diversified markets across the board lost value leading to the idea that diversification had taken a holiday,” he said. “Our view is that fundamental changes such as the credit crisis overwhelmed the fairly subtle distinction between asset classes. Investors look for stability in historical averages but there are times when long-term averages don’t apply.”

The problem is, for example, that most emerging markets indexes or funds own multinational companies operating in emerging countries and are closely correlated with developed markets, including the United States.

“To get growth in the emerging markets you have to buy companies that sell to domestic markets for example and infrastructure funds that that aren’t just reworked utility and real estate funds,” he said.

Jim Van Heuit, a senior vice president at Callan and Associates, which works with Genworth Asset Management, disagreed. He said that “diversification is important even if over time markets have the same rate of return. Diversification still gives you less volatility than each individual asset class and if you don’t diversify you may miss out on some major market opportunities.”

He said rebalancing is key to protecting clients and making sure they buy low and sell high.

Inflation remains a primary concern for most investors. Van Heuit said inflation is not a serious threat.

“When inflation does rise it will return slowly, and the government will have time to unwind and remove deficit spending,” he said.

Van Heuit said a there is a lot of slack in the private sector as companies continue to sit on cash, not borrowing and banks not lending. The stimulus money simply filled in for that, so government spending will not necessarily lead to inflation, he said. Therefore, assets like TIPS and commodities that people hold as inflation hedges shouldn’t be a dominant part of any portfolio.

Knepp agreed that inflation wouldn’t necessarily be driven by U.S government spending, but real consumption may be challenged by a drop in income, which could lead to a weaker dollar and more expensive imports.

“Inflation will come from inflation in developing countries and when that’s reflected in imports, our cost of living will be more expensive,” he said. He estimated this would happen over the next three to five years. As a result he is looking to invest overseas.

Knepp argued that growth in profits was not sustainable because companies can’t cut costs forever. “Investing in corporate and high-yield bonds where there is still an incremental gain in return is as attractive as investing in equities,” he said.

He recommends looking for companies with sustainable pricing power and dividend reinvestment as well as investing overseas.

Van Heuit said that the equity risk premium would return. “People think it’s gone because the last 10 years the return on the S&P 500 was negative,” he said.

But this isn’t the first time that this has happened; it also occurred in the 1970s. He said that he thinks absolute equity returns will grow at 5% to 7% over 0% for Treasuries. “Stocks will grow slowly, but bonds won’t do well,” Van Heuit said.

How will the risk premium return? The answer was threefold: “We see real earnings increasing 3% over the next 10 years, 2% of the premium would come from dividends and there is potential for corporate actions,” he said. “Companies are sitting on cash savings and they will deploy it by increasing dividends and starting to buy back stocks.”

He agreed with Knepp that companies can’t continue to cut costs, but they can expand output without increasing their costs.