How many individual investors have carefully built a portfolio across multiple asset classes using direct investments in stocks and bonds, for example, and through breadth alone believe they are diversified? It is unlikely they have selected such underlying investments randomly, and so whatever philosophy and process has led them to their investments might leave them undiversified in this second dimension. But what if they have outsourced this expertise in investment to a third party? For sure, they might be able to diversify in the first of the dimensions, but can they really in the second? Any individual, whether an investment professional or not, is likely by themselves to be able to diversify by the type or style of investing.
What conclusion does this lead us to? Simply, more is more when it comes to diversifying. It is not simply enough to invest across multiple asset classes and sub asset classes if you want active stock and bond selection – diversifying your underlying investment managers is of significant importance. Multiple decision-makers, assuming they are each skilled in their roles, are likely to deliver a better – in risk-adjusted terms – return, than any individual decision-maker, however skilled he or she might be.
James Bateman is head of portfolio management in Fidelity’s Investment Solutions Group
