Advanced Diversification: The Future of Investing

When it comes to modern investing, the contemporary is very much complemented by the classic as the seasoned adage that you shouldn’t ‘put your eggs in one basket’ often rings true.

As horizons stretch and the world becomes more diverse and increasingly well connected, investments are more often impacted by political, economic and even local events. There are two sides to this increased volatility, as investors can experience both downside falls as well as upside opportunities for growth. We believe that creating a diversified, long-term investment strategy is key to managing the increased fluctuations and volatility in the market that investors now experience.

Diversification ranges from the very simple, through multi-asset strategies and now to the latest revolution in investing, advanced diversification. This is a scientific method of combining a wide range of investment expertise with data analysis at a huge scale, which we have pioneered to build our True Potential Portfolios.

Simple Diversification

Diversification is spreading your investment in a way that reduces your exposure to to one single area. When explaining this to clients, or indeed considering your own investments, a very simplified analogy of how this works is useful.

For example, if you are solely invested in an oil company, let’s say True Petroleum, your investment relies almost entirely on the price of oil. Should the oil price rise, True Petroleum will see an increase in profits and their share price will rise too. Your investment, in this instance, will be a profitable one.

However, if the oil price falls, as it often does, profits at True Petroleum will reduce and your investment will fall. In this simple analogy, diversifying your investment could reduce the impact on your investment.

Imagine you are also invested in True Potential Airlines. The largest of their overheads is airline fuel and the cost of fuel is dictated by the price of oil. In the case of a reduction in the oil price, your decision to invest in True Potential Airlines would be prudent. As the price of oil drops, the overheads of True Potential Airlines fall, impacting positively on their overall profit, and so your investment in them.

Although simplistic, this analogy highlights the importance of diversification. By spreading assets across two companies, you can reduce the chances of one event causing your investment to fall.

Multi-Asset Diversification

Taking the simple idea of diversification further, many fund managers use ‘multi-asset diversification’ to invest in a range of asset classes, industries and geographic regions. This strategy aims to reduce risk and seek out potential opportunities for growth.

• Asset class – investing in a mix of different assets, such as cash, shares, funds, Government bonds, and property. Different assets react differently to world and local events, and a spread of assets in your investments can help to manage market fluctuations.
• Industry – as with asset classes, investing in different industries can help reduce the impact of a single economic or political event on your investments. When some industries struggle, others will thrive (for example the oil and airline industries) so having a range in your investment reduces the risk of your investment falling and helps discover potential opportunities for growth.
• Region – investing in a range of regions and countries can mitigate the impact of stock market movements in a particular area. For example, the impact of Brexit has been different across the globe and even within certain regions, such as Europe.

The Next Level: Advanced Diversification

Many fund managers use a multi-asset investment strategy to deal with today’s often volatile markets. So, how can you give your investments an edge? We all know that two heads are better than one, so surely seven heads are even better?

In our True Potential Portfolios, we’re pioneering what we call advanced diversification. We bring together eight world-class, multi-asset fund managers to create a range of ten unique Portfolios diversified by asset class, industry, region and investment manager.

These managers, including UBS Asset Management, Goldman Sachs, Allianz, Columbia Threadneedle, Schroders, SEI, Close Brothers and 7IM, bring over 10,500 investment professionals in 200 locations and more than 120,000 individual holdings to the Portfolios, and have a combined £4.5 trillion under management.

By using their expert views on the markets and diverse investment strategies within the Portfolios, we can find trends, patterns, threats, anomalies and, ultimately, potential opportunities for investors.

We use these strategies when building and rebalancing the True Potential Portfolios, allocating assets where we see the greatest opportunity for growth, whilst remaining in your chosen risk profile. It’s the expertise of many and the power of one.

Diversification in itself is not new, however we believe that using the combined expertise of eight world-class, multi-asset managers in our Portfolios is a revolution for investors. Alongside our research and data analysis capability, only possible using our in-house technology, we are delivering something new: Advanced Diversification.

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