The art and science of diversification

To diversify, or not to diversify?

At first glance, few would argue against the logic of diversification: “Spread your risk”, “think in bets” … the reality is more complex, however. As Warren Buffett famously said, “Diversification is a protection against ignorance. … [It] makes very little sense for those who know what they’re doing.”

The psychological temptation to jettison portfolio diversity when only a handful of technology stocks would have served well, as would a decision (for US investors) to stay domestic, is huge. And not just for private investors. Style drift happens in equity portfolios as periods of underperformance drag on, and the pressure to chase returns mount—even the most robust investment processes, philosophies, and egos are susceptible.

This publication is dedicated to exploring the tough realities of understanding and achieving diversification. It covers a range of perspectives and asset classes, and includes a simulation of over 1,000 random portfolios, alongside essential insights from practitioners and academics alike.
 

A Brief History of Diversification: An Interview with Professor Paul Marsh

Paul Marsh has access to one of the most impressive databases of asset class returns. UBS interviews Paul about his views on diversification and asset correlation trends over time. Read more

The Non-linearity of Diversification

Correlations between asset classes are not static. Michele Gambera, Fatomata Konteh; and Gianluca Oderda, analyze the relationship between various assets, particularly during times of elevated inflation and market stress, to assess which assets are useful diversifiers and in what scenarios. Explore further

Needles in Haystacks: A Stockpicker’s Nightmare

With stock market gains being driven by only a handful of companies, Ian McIntosh ran 1,000 simulated portfolios at random to see just how difficult an environment it has been for active managers. Discover more

The Beauty of Indexing: Alleviating Concentration in Cap Weighted Indices via Other Indexing Techniques

With the increasing concentration of many equity markets, Boriana Iordanova explains how rules-based techniques can help offer more effective portfolio diversification than traditional market cap weighted indexes. Read more

Diversifying the Diversifier: Challenges for Multi-Manager Alternatives in Portfolios

Alternatives play a key role as a diversifier in portfolios. Daniel Edelman and Edoardo Rulli look at the challenges and benefits of using multi-managers to broaden access and capture distinctive market traits. Read further

The Evolving Role of Private Equity in Diversified Portfolios

Are private equity portfolios really offering diversification benefits vs. public markets? Or is it just a mark-to-market illusion? Markus Benzler and James Pilkington offer their views. Explore further

Comparative & Competitive Advantages: Reflections on Supply Chain Concentration

As the world continues to fracture and fragment, effective supply chain management is increasingly important to companies’ profitability and resilience. Massimiliano Castelli and Lucy Thomas explore the crucial role of geopolitics and sustainability in such strategic and operational decision-making. Dive deeper into the analysis