ASSET DIVERSIFICATION: OUR SENSIBLE APPROACH
August 2007

The current turbulence experienced in global markets continues to create concern in the asset management industry.

This volatility is of additional concern when viewed against the relative inability of seasoned investment professionals to predict the short and medium term market trends.

Whilst the recent collapse of the US sub-prime market, and the associated global ripple effect, is a comparative novelty, it nevertheless underscores the general truism that economies are susceptible to both predictable and unpredictable events. Linked to this is another investment adage, which is that there is no such thing as a risk free investment.

Another factor also needs to be highlighted: Correlations between asset classes, both traditional and alternative, have tended to increase in recent years, and this means that diversification will not always have the effect of reducing the overall market risk.

It is against these principles that we have, since inception, embraced an investment model which has low-correlated asset diversification at its core. After this, we ensure, through our satellite investment approach, that a client's portfolio remains evenly keeled.

Whilst such an approach is now seen as trite in the industry, recent studies have revealed that a large percentage of investors fail to understand both the need for diversification and how to achieve it (source: Scottish Widows Investment Partnership)

At a basic level such a diversified approach ensures that each portfolio is exposed to traditional and alternative asset classes. Ignoring the current industry debate as to which asset falls within which category, this approach, generally, covers fixed income securities, hedge funds, cash, real estate and commodities.

At the next level, further diversification reduces both correlation and risk.

Equities, for example, are chosen from different sectors, industries and geographical zones. Corporate bonds can be similarly picked and further diversified by differing maturity dates. Structured products present a further alternative strategy to equity investing.

Commercial property investments further spread the risks across geographical zones and industry sectors.

With regard to alternative investments, hedge funds of funds are preferred over single strategy funds, and carefully selected private equity funds further entrench the diversification approach.

Finally, our approach ensures that an investment is exposed to all the major currencies (Sterling, Euros and USD). This not only serves as an effective hedge but can have the effect of increasing returns through changes in currency valuations.

Whilst the diversified approach may appear to be initially active followed by long periods of relative inactivity, it is crucial that we constantly monitor the economic environment and, from time to time, make suitable changes to the asset class weightings.

An example of this was the recent fall in confidence over fixed income assets in the UK, which necessitated an intervention to reduce investor exposure to this class during a period of rising interest rates.

Of course this cautious approach will not suit aggressive investors seeking consistent double digit returns, but for those private clients who seek financial peace of mind, proper diversification has to be the optimum investment approach.

Jarrod Cahn / Rupert Silver