Fund Selector: To diversify or not diversify

Is the diversification question even valid any more?

Touted as the only free lunch in investing, the concept has shown enormous resilience in the face of allegations that it failed investors when they needed it most – in September 2008.

Nobody seriously questions its credibility these days. Agreed, in times of extreme stress its powers may well be diminished.

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However, even when not fully firing, diversification is still a worthy objective. Owning assets with low, or ideally negative, correlations helps to balance a portfolio, with certain assets reacting differently to others. The net result is better risk-adjusted outcomes.

The number of times Hamlet’s infamous quip “to be, or not be, that is the question” and the concept of diversification have been linked together is vast.

Perhaps, though, Shakespeare’s greatest insight into our world, and that of diversification specifically, is not to be found in Hamlet but in the Merchant of Venice, when the protagonist Antonio says in the opening scene:

“My ventures are not in one bottom trusted, Nor to one place; nor is my whole estate, Upon the fortune of this present year; Therefore, my merchandise makes me not sad.”

Such insight still applies today, in spite of the wildly different context and landscape. Was there no end to the man’s talents?

As multi-managers, we are constantly trying to find and achieve balance. This applies both at the asset class level, predominantly between equities and bonds, but also at the underlying fund level.

We blend funds together which complement each other due to having different characteristics and thus create a further level of diversification in our portfolios.

Holdings such as JOHCM UK Equity Income provide balance to the UK fund selections. We bought back into this after the fund had haemorrhaged assets and fallen to just £80m in size following a period of difficult performance.

It now stands at £1.4bn and is third out of 62 funds since it launched. The approach of the management team differs to others in the same sector, and the management team’s flexibility and pragmatism, coupled with a reading of markets with an eye to yield, has rewarded investors.

Our focus on diligent fund selection over and above making top-down macroeconomic calls has proved its worth.

And with the direction of economic events continually hard to call, we will stand by this and are confident it will continue to reap rewards.

So not only did Shakespeare anticipate the posing of the diversification question by providing marketers with an open goal in terms of catchlines, he provided the answer too.

It’s not often we find ourselves taking inspiration from literary giants. However, when it comes to diversification it makes perfect sense.

As Shakespeare was fully aware, finding a healthy balance of assets is key.