Gontse Tsatsi 0:00 Hi, my name is Gontse Tsatsi, Head of Retail
Client Management at Old Mutual Investment Group.
And I'm joined by Portfolio Manager, Graham Tucker.
We're going to talk about diversification.
Diversification is a topic that comes up in most conversations around investments.
Graham, why is diversification necessary?
And can one overdo it?
I'd also like to find out from you what the key opportunities are from a diversification
perspective, and how we incorporate those into the portfolios that we manage.
Graham Tucker 0:39 Diversification is the act of blending different
assets together in a way to reduce your exposure to a particular asset, or a particular risk.
We typically want to have maximum gain, maximum returns, but without taking on any risks,
so minimizing the amount of pain that we might feel.
And one way you see this, is when investors move into cash in a significant way, it's
because cash gives them that safety.
But as we discussed in another section of Long-Term Perspectives, cash is a very poor
long-term investment.
It might be appropriate in the short term, but in the long term, it's not an asset that
you want to hold, it doesn't give you the returns that you require.
Graham Tucker 1:26 It's very easy to over diversify.
The temptation can be to try to remove all of the risk from a portfolio.
But what you then might be sacrificing is potential return.
Because when you look at your over diversified portfolio, at the end of the day, you might
actually find that you have no direction in your portfolio, you have no key view or key
driver being expressed in that portfolio.
So, in the act of trying to get rid of risk, what you're actually doing is also potentially
getting rid of return.
When you're talking diversification, a lot of people will talk about it as reducing the
volatility in your portfolio.
So, if you think of a roller coaster ride, the volatility is the ups and the downs that
you would experience in a roller coaster.
So, when we think about reducing the volatility of your portfolios, there are a few classic
instruments that come to mind: global bonds, global cash, and gold.
Those are well known to be classic risk diversifiers or volatility reducers in portfolios.
And a common element with all of those is actually the currency, the currency plays
a very important role in that.
Graham Tucker 2:35 So, in thinking about the opportunities to
diversify your portfolios, we need to first identify the risks.
The three key risks that we see at the moment are in the US around inflation, in Europe
around growth, brought on by the conflict and war in Ukraine.
And thirdly, in China, where they're still implementing quite hard lockdown policies
for Covid.
And that's obviously having an impact on their growth and on supply chains.
So, when thinking about those risks, where are we seeing opportunities to diversify your
portfolio?
Well, number one is global cash is starting to look more attractive today than it has
in the past few years.
Global cash is not something we would like to hold long-term in portfolios, but on a
short-term basis, it is giving us some degree of protection against the uncertainty out
there.
The second space is around quality and certainty.
So, quality of earnings and certainty around dividends and the ability to grow the dividends
of companies.
So, in a sense, it's talking about more of an absolute return mindset.
For example, if you can buy a company that is giving you a dividend yield of 7 or 8%,
that is very attractive in this current environment.
And third, we're trying to identify companies and assets that are going to be able to deliver
good returns, even in a weaker macro-economic environment.
Diversification is an incredibly powerful tool when managing the overall risk and volatility
of your investment savings.
However, knowing when and how to use diversification requires careful consideration.