An active approach to diversification

The only investors that don’t need to diversify are those that are right 100% of the time – Sir John Templeton.

| 6 min read

Imagine you’re at a buffet. Most of the food on the table looks appetising – especially those vol-au-vents! – but you can’t taste something before you put it on your plate. Your reaction: diversify. A bit of this and a bit of that. Focused on what looks nicest, but not too one-sided. Those pastry treats might not taste as good as they look!

We apply the same principle to investing. A portfolio should look like a plate from a well-stocked buffet, not one that has just received the contents of a tin of beans. Variety won’t necessarily give you the best outcome, but it should offer good results and avoid the worst of disappointments.

Diversifying in investing means spreading money across investments in different regions, sectors and asset classes – so not to be overly reliant on certain ones. But how to maximise potential while avoiding ‘di-worsifcation’, overly diluting strong returns with weaker ones? Or, to expand the buffet analogy, the snacks you wish you hadn’t added to your plate because they aren’t that great, or they are similar to something else. We think an active approach that considers the economic environment and seeks to maximise the opportunity while controlling risk works best.

This is the philosophy we apply to our multi asset funds and portfolios, with our experts handpicking from different asset classes, regions and markets. Each fund in the range is designed to offer a diversified portfolio and meet a broad risk profile, with portfolios are reviewed on an ongoing basis and changes made in reaction to the changing environment and new opportunities.

While there are lots of multi asset providers to choose from, their products are not all created equal. There are several reasons why we believe we have an edge in generating strong results for our investors.

Broad diversification and no home bias

Our multi-asset funds and portfolios offer true diversification – not just equities and bonds. We use carefully selected investments in areas such as infrastructure, property and absolute return strategies to complement these and provide opportunities that don’t exist in the realm of traditional investments. We are also truly global in our thinking, simply aiming to maximise returns as best we can. Some multi asset funds are highly concentrated in the UK – and their performance at times has suffered as a result – but our approach is geographically flexible as we don’t have any fixed or banded allocations to certain areas.

Dynamic blend of active and passive

At Charles Stanley, we are proud of our independent thinking and flexibility. We are neither wedded to ‘active’ nor ‘passive’ strategies for fund choices in our underlying portfolios and can cherry-pick the optimum strategy for our needs. Passive investments are designed to simply follow an index and can be significantly lower cost than active funds that try and beat the market. Presently, in our portfolios, we are positioned about 60/40 passive to active, but we alter this ratio over time. If we think there are more inefficiencies for active managers to exploit, we allocate more towards active.

We are currently investing in active funds in Asian and Emerging Markets where we believe there is more opportunity for active managers to add value, whereas in developed markets we are more biased towards low-cost passive funds outside some more thematic strategies. Specialist bond funds are also used for parts of the market where we think particular expertise is required. Finally, unlike many managers, we use investment trusts, which we believe can have several advantages. In particular, to access unique strategies in more esoteric asset classes, or areas, where liquidity (the ease of buying and selling the underlying investment) is more problematic and is far better dealt with in a ‘closed ended’ structure of an investment trust.

Harnessing key themes

Having a broad, diverse portfolio doesn’t mean missing out on key investment themes. We seek to harness important structural trends while managing risk. For instance, the transition from fossil fuel to renewable sources of energy is a multi-decade phenomenon where capital will be reallocated on an unprecedented scale, creating investment opportunities across a multitude of sectors and industries. We presently hold Schroder Global Energy Transition Fund, which invests across the entire sustainable energy industry from production to end-use. We believe a selective, disciplined and active approach such as the one adopted by this fund is a sensible means of accessing an exciting area.

We are also aligned with the ongoing digital transformation of the economy through exposure to funds that follow the Nasdaq, the US technology index, as well as through active funds weighted towards technology and innovative healthcare such as Baillie Gifford Positive Change and Baillie Gifford Global Discovery.

An eye on the downside (and upside!)

We always build a ‘base case’ through our macro-economic research, but we are pragmatic, aware there will always be risks that this is wrong on either on the upside or the downside. Currently, our base case assumes a decent economic recovery accompanied by accommodative central banks and low interest rates, but we are also mindful of negative factors such as the pandemic worsening or central banks making an error. We have some hedging strategies in place, especially in our lower risk portfolios in recognition. We are also open to the possibility that inflation could be less of a problem than feared or a more widespread resolution to Covid takes place quicker than anticipated. Building different scenarios and establishing their likelihood helps us construct portfolios that appropriately balance opportunity and risk.

Low charges

We believe that delivering value to investors is about providing high-quality investment solutions that help investors reach their financial goals – of which low costs are an important element. Financial markets are unpredictable, but cost is one thing investors can control and minimising it helps maximise returns. We have great value all-in costs versus many of our actively managed competitors.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

An active approach to diversification

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