A prospective client arrived recently with a portfolio of fourteen funds accumulated over twenty years, each bought for a good reason at the time. He described it as well diversified. It was not.
Eleven of the fourteen were global or US equity funds. Underneath the different names, the same dozen large American companies accounted for a very large share of the whole thing. He owned one position, expressed fourteen ways, and was paying fourteen sets of charges for the privilege.
Look through the wrapper
Diversification is a property of what you own, not of how many lines appear on your statement. The only way to know what you own is to look through the funds to the holdings underneath and add up the exposures.
Fourteen funds, one bet. The statement looked cautious. The portfolio was not.
When we do this exercise for new clients, the two things we find most often are a much larger concentration in US large-cap technology than anyone intended, and a home bias in whichever market the client happens to live in.
What actually diversifies
Assets that behave differently from one another in the situations you care about. Not on average, but at the moments when it matters.
- Across asset classes. Equities and high-quality government bonds are the foundation, because they have historically responded to a downturn in different directions. Note high-quality: credit behaves rather more like equity than the label suggests, and does so exactly when you would least like it to.
- Across geographies and currencies. With attention to whether the exposure is genuine. A UK-listed multinational earning in dollars is not really a UK holding.
- Across time. Investing in tranches rather than all at once diversifies the entry point, which matters most for large one-off sums.
What does not
Adding funds. More managers within the same asset class mostly average each other out — you end up with something close to the index, at a materially higher cost.
Sector funds bought after a strong run. This is concentration wearing the costume of diversification.
Alternatives added for their own sake. Some earn their place. Many are equity risk with a longer lock-up and a higher fee.
How to check your own
Take your holdings and group them by what they actually are rather than what they are called. If a single category is more than you would be comfortable holding on its own, that is your real position — regardless of how many funds it is spread across.
It is a slightly tedious afternoon’s work, and it is the most useful thing most investors could do with one.
An invitation
Would it help to talk this through?
An hour, at our cost, applied to your own numbers rather than an illustration.
Request an audience