Ben Seager-Scott, head of multi-asset funds at Evelyn Partners, said while the importance of diversification was clear, allowing exposure to different sources of risk and return to mitigate exposure to single-market and macro-economic events, it was also vital not to overcomplicate portfolio allocation.
He told FTAdviser: "Over-diversification can become counter-productive so it is important that multi-asset fund managers are sizing their risk exposures appropriately to balance the needs of diversification and meaningful investment exposures.
There are rare periods where there is nowhere to hide.Ian Jensen-Humphreys, Quilter Investor
"Managers also need to make sure they fully understand the interactions between different positions, as diversification only works if correlations are properly accounted for."
Guillaume Paillat, multi-asset fund manager at Aviva Investors, agreed that managers and advisers should not be advocating diversification just for its own sake, because striking the right balance was vital.
Paillat said: "Not all diversifiers should be treated equally. When adding diversifiers to a portfolio, we need to balance conflicting objectives: correlation to risk assets, income, liquidity and cost."
He explained that low correlation to equities at a time of extreme underperformance can important but can come at the expense of income returns, so assets like gold must be carefully sized.
Likewise, he said liquidity is also an important factor, especially in the current environment, so property or specialist credit allocations need to be managed accordingly.
So while, according to Wilshire, risk-off assets might have done well in the first quarter of 2023, it is not possible for managers to time the markets or guess the unexpected, such as upticks in inflation or geopolitical events unfolding.
Therefore, Paillat said: "Our approach is to focus on incorporating a core blend of differentiated but liquid assets, and we manage that size and composition of the mix actively depending on the market environment.
Ian Jensen-Humphreys, portfolio manager at Quilter Investors, said the problem with diversification for its own sake is that traditional portfolios have been challenged by the events of 2022.
He said: "Traditional multi-asset managers will look at diversification in a bond-equity sense, but as we have witnessed over 2022, there are rare periods where there is nowhere to hide.
"The key thing is to consider diversification in multiple dimensions – from geographic, to styles, factors, strategy, implementation and teams, among others.
"The bottom line is that the way the money is run is an important diversifier in itself."