Investors are also diversifying their portfolio by granting their active managers much more freedom and flexibility to seek out profitable opportunities wherever they might find them. The pendulum is swinging away from benchmark-tracking funds that seek to add an incremental 1-2 per cent per year over an index. Investors were happy to track a benchmark on the way up, but are understandably reluctant to track a benchmark on the way down. As a result, active managers with successful track records of identifying the most profitable opportunities across the investment spectrum are enjoying a resurgence in popularity.
That being said, a truly diversified portfolio will inevitably have investments that occasionally underperform. Different asset classes will periodically fall out of favour, and even the best active managers will have bouts of poor performance. For example, one could build a strong case that carbon emission rights make for an excellent diversification option. However, it’s much more difficult to see the benefits if you purchased your carbon rights at 30 euros a ton and they’re now trading around 5 euros. When discussing diversification, a simple but forgotten truth is that if everything in your portfolio is going up at the same time, you are not diversified.
The original objective of diversification was to maximise returns and minimise risks. These goals remain the same and are as important as ever. The biggest challenge today’s investor faces is to diversify in a globalised world.