Ask any investor if they hold a diversified portfolio and they’re likely to say yes. Look inside their account and it’s a different story.
“People think if they have 10 or more stocks they’re well diversified,” says Sadiq Adatia, chief investment officer, at Toronto-based Sun Life Global Investments. “If some of these stocks are outside Canada they think they’re even more diversified.”
While that may have passed muster years ago, when equity markets were far less correlated to one another than they are today, just owning stocks in different countries doesn’t cut it anymore. Diversification is far more complex, says Mr. Adatia.
Now, diversification – which reduces an investor’s overall risk – involves owning different asset classes, such as real estate and infrastructure, along with equities and fixed income. Many firms are now taking a more pension plan-like approach to portfolio construction and are incorporating all sorts of different assets to protect and grow capital, he says.“
You have think about more than stocks and bonds,” says Mr. Adatia. “Investors should consider holdings like real estate and infrastructure investments – the types of investment you’d see in a big pension plan.”
Avoid false diversification
When creating a portfolio, it’s important to avoid what Mr. Adatia calls “false diversification,” which refers to holding a wide array of stocks and bonds that, on closer examination, are all in the same or nearly-the-same characteristics.
For instance, a client might hold telecom stocks and the corporate bonds of telecom companies. If the sector runs into problems, then all those investments could be under pressure.
Owning different sectors in a single country, especially in one like Canada, which is concentrated in financials, energy and materials, can also create diversification problems.
“Some people invest too much in Canada, just because they live in Canada,” says Mr. Adatia. “Confidence in Canada is great, but the Canadian economy makes up about 4 per cent of the global economy, and a diversified investor needs exposure to global markets, too.”
Investors can also be too concentrated in a specific style, like value or growth, says Darren Coleman, senior vice president at Coleman Wealth in Toronto. He suggests owning funds that that are run by managers with different investment philosophies.
“Investment styles present a very good opportunity to diversify within asset classes,” he says. “A value manager and a growth manager, for example, may both look at the same company and one is a buyer and one is a seller — and both can be right according to their discipline.”
Let others diversify for you
With a number of investment firms now offering highly diversified all-in-one products, finding a diversified portfolio has never been easier. For instance, the Sun Life Granite Managed Solutions, which are overseen by the Sun Life Global Investments Portfolio Management Team, hold a broad selection of top mutual funds and ETFs. Different funds and ETFs correlate to different risk profiles, so advisers can choose the right one for their client.
Once the adviser chooses a portfolio for their client, the Portfolio Management Team actively monitors economic indicators, market fluctuations and market outlooks, and makes changes to the Granite Managed Solutions as needed.
Having that kind of flexibility is another key part of diversification – if there’s an opportunity to buy something less correlated to other assets in the portfolio, then the manager should be able to take advantage of it, says Mr. Adatia.“
When you create a diversified portfolio, you have to make sure it continues to be diversified,” he says.
Products like Sun Life Managed Solutions offer clients the consistency they need to build a well-balanced portfolio, Adatia adds. It’s like building a car, he says. Every piece needs to work well together for it to run smoothly.
“You can't just have a steering wheel and seats – every part of a vehicle has a role," he says. "It's the same with a portfolio. If you're missing something, then it'll be more difficult to get to where you need to go."
Advertising feature produced by Globe Content Studio. The Globe’s editorial department was not involved.