Diversification is intended to help smooth portfolio returns over time, but simply owning more investments doesn’t always achieve that goal. The key is finding assets that react differently to the same market events, rather than adding more of what behaves the same.
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AJ, years ago we saw this product, a fund that was a manager of manager’s portfolio. It sounded good on paper, but as time went on, it seemed to underperform. When does diversification actually become dilution and underperform?
Yeah, it’s a good question.
And remember, the primary goal of diversification is to try to smooth out returns in a portfolio over time. And I think diversification can best be achieved by finding a handful of things that react differently to the same headline or data point or input or stat than your traditional stock and bond portfolio might.
So in the case of these manager of managers products, the reality is if they’re all buying the same three or four things that make up 30 or 40% of their portfolio and then just trying to round off the back end with a handful of things that are different, the whole portfolio is going to react pretty similarly as your standard portfolio would.
So, I think if you’re trying to find diversification, you need to find these things that react differently. And that could be anything from real estate, it could be cash, it could be gold, and it could even be Bitcoin.
So, I don’t think it’s necessarily the quantity of holdings that leads to adequate diversification. And that also makes the case for probably just having one advisory team manage the whole collection of assets.
So, is this a case where less is more?
Yeah, we think so.