Diversification is part of investment risk management. By spreading funds over a wide variety of investment types within a portfolio, investors are able to dilute risk to any one investment and yield higher returns.
There have been many studies which demonstrate the effectiveness of this risk reduction technique. Maintaining a diverse portfolio neutralises the negative performance of some assets with positive performance in other areas.
Investment diversification is often carried out across asset classes, with calculated percentages of the portfolio to allocate to each. From stocks and bonds, real estate, to short-term investments, investors will diversify further, choosing asset classes which are separate enough to not share risk.
As one of the UK’s leading investment managers, LGIM offers knowledge and experience that can bring real benefit to investors looking to control risk in their portfolios, and achieve a smoother path to reaching their desired client outcomes.
Our approach to risk management is embedded in our portfolios’ asset allocation with the aim of being prepared for a wide range of market outcomes. This is achieved partly by holding some defensive assets, but predominantly by spreading risk across a wide range of asset classes.
Our Asset Allocation team includes dedicated and experienced economists, strategists and portfolios, who combine their expertise to deliver clear client outcomes such as growth and income via diversified portfolios. The team’s disciplined, objective driven approach means we manage the risks that matter to clients, while aiming to deliver long-term risk-adjusted returns that meet clients’ needs.
True diversification requires looking for independent return streams. You normally cannot rely on the weather, but in investments that lack of reliability is an interesting feature.
Correlations show us how assets have moved relative to each other in the past. As multi-asset investors, one of our key objectives is to identify assets that improve diversification. To do this, we try to combine assets with low or even negative correlations. This sounds easy, but can be surprisingly difficult in reality.
Emerging market assets have long been a source of both potential profit and peril for investors. 2017 saw an incredible streak of capital inflows into emerging market equities, bonds and currencies. Whilst returns are still characteristically volatile, this historically maverick asset class has become more mature and resilient than ever before, as was highlighted during February's market sell-off.
‘Less is more!’ That is what correlation wants to brag about to enhance diversification. However, following the financial crisis, many believe that correlations are at an all-time high – is this the end of low correlations? We think not.
In my previous post I outlined the possible benefits of using multiple asset classes to achieve a more stable and attractive level of yield from an income-focused portfolio. In this post I take aim at targeting a fixed level of yield, showing that this objective could mean you miss the big picture.
Much like the choice between TV channels, income investing was easier in the old days. Investors seeking stable and attractive income from their investments needed to look no further than bonds. These days, with yields near historic lows, many investors are looking elsewhere.
Soviet-era Polish cinematography is often a source of seemingly absurd catchphrases repeated for generations. “How much sugar is in your sugar” is a classic one from the quirky professor in the 1973 comedy Man-Woman Wanted. When we target particular factors within our equity exposures, I increasingly find myself taking on the role of the professor as I try to answer the question “How much factor is in my factor?”. It might seem like an odd question but we can answer this by relying on simple factor definitions and a holistic approach to combining factors. It’s only once we know what our true exposures are, that we can consider how we avoid any unintended secondary exposures that have the potential to sour the overall outcome.