Putting diversity at the heart of investment

This article is part of
Multi-Asset Supplement - March 2014

Diversification is also important to protect against the effects of market trends. A prime example was the high levels of consensus at the start of 2014. “When everybody is agreeing with each other then you have to worry you’ve missed something,” she says.

Being diversified in such scenarios, therefore, is worth considering because even though you may sacrifice some of the potential upside if the consensus view appears correct over the short term, you won’t be left overly exposed if this doesn’t prove to be the case.

It’s also worthwhile when there is uncertainty in global markets. The Russia-Ukraine unrest in recent weeks perfectly illustrates the point, according to Carbonneil who says the outcome of such situations are impossible to predict. “I don’t have a crystal ball but what’s sure is that it brings volatility,” she says. “When you have volatility you want to diversify.”

On that point, it’s worth exploring current positioning of portfolios, which includes being slightly overweight both Europe and the United States.

“Even though Europe is volatile it is somehow going in the right direction,” she explains. “In the US I was more overweight last year but took some profits, while we are neutral on the UK where there have been some positive statistics released on business investment.”

Elsewhere, there is a slightly underweight position on Asia and Emerging Markets. “Yes it’s cheap but you need a catalyst,” she insists. “All the problems in Russia and the Ukraine are likely to bring some more volatility to the market.”

Of course, diversification is great but the key to using it lies in the way that portfolios are constructed. “Sometimes you can find really good managers but if you add them to what you already own it’s not going to bring anything special,” she adds. “That can happen.”

That is why the Architas investment process has been designed to aim to find the most appropriate mix of managers required to construct well-diversified portfolios. Vital cogs in this machine are the company’s in-house professionals who are consistently researching and monitoring.

This process starts with asset allocation where the team decides how much to put in the various areas, before manager research and selection takes place. This involves using various tools to explore the investment universe and identify those worthy of further attention.

Blending these chosen managers together – taking into account their various characteristics –is next and aims to produce well-diversified portfolios. After this they will be monitored closely to ensure they are still delivering as expected.

There’s little doubt that the rapidly growing and increasingly complex active fund universe requires advisers to be aware of their clients’ needs and to know more about the philosophy and process of the investment companies with which they deal.