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Real Diversification

By Simon Bottle, Jun 17 2014 08:47AM

So what does a good DFM deliver in a nutshell? Very simply they are engaged as an expert investment manager by the adviser firm to manage the whole or a portion of their clients’ investment portfolio. Rather than being a single fund, a DFM provides a one-stop-shop massively diversified portfolio which contains allocations to numerous managers and strategies. These are blended to make real returns in line with the individual investor’s objectives and risk tolerances with the aim to build wealth steadily irrespective of market conditions.


Asset allocation is the main contributor to a portfolio’s return and can determine as high as 90% of the overall performance over time. So it has to be right. But what is good asset allocation? It is constructing and managing a globally diversified portfolio that contains the right investments at the right times to give the best chance of delivering the performance the client requires whilst minimising the risk of loss and volatility on their capital.


When people think of successful asset allocation they think of diversification. Good asset allocation does have diversification at its heart. But very often investors who think they are diversified enough are actually not at all.


But how to achieve diversification that truly gives the client the required protections and performance? How to blend the right investments in the right quantity together at the outset and then ensure the portfolio is managed and rebalanced to deliver performance?


For be under no illusions – building the type of portfolio that is suitable for each clients’ circumstances with the right mix of risk versus return as well as the right spread between different sorts of assets and investment strategies, and managing it over time is hard work requiring expert knowledge and experience and 24/7 attention to the task


We are not going to bang on about diversification as if we invented it, but the key question is how can an investor get enough of the right diversification in a £25,000 their portfolio?


Investing across different asset classes and countries is very important and in most market conditions it provides good diversification benefits. It’s known as multi-asset investing. But here’s the critical point – even though it is very important it’s not enough.


Is another worldwide crash likely in the next 5 years with 40% equity market losses? No. But could it happen? Absolutely. If investors’ portfolios are not prepared for the possibility of these type of events, then they are not diversified enough and they are exposed to the chance of the type of losses that portfolios can take years to recover from.



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