• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to secondary sidebar
  • Skip to footer
  • Subscribe
  • Twitter
  • RSS Feed

Investment News NZ

Investment News provides financial advisers news stories from the financial industry in New Zealand. Subscribe to our free weekly newsletter.

  • Home
  • News
  • Kiwisaver
  • Subscribe
  • About
  • Advertise
  • Contact
You are here: Home / Investment News / Diversification not the panacea we thought – Milliman

Diversification not the panacea we thought – Milliman

May 15, 2016

Michael Armitage: Milliman head of fund advisory services
Michael Armitage: Milliman head of fund advisory services

Shock horror! Milliman says that diversification may not deliver what we have thought it would deliver since way back, since the dawn of Modern Portfolio Theory, when we were kids. A new study shows that investors need a ‘multi-layered’ approach.

Michael Armitage, the Sydney-based head of fund advisory services for consulting firm Milliman, says diversification is just one risk management tool – not a comprehensive risk management solution.

Multiple asset classes won’t lower portfolio risk when the same factors drive each asset classes’ investment returns. Armitage says:

“Diversification cannot provide protection against systematic risk, such as a global recession, when all major asset classes tend to fall in unison.

“Derivatives such as futures, which offer significant liquidity and transparency, can be used as a cost-effective second-layer safeguard against volatile markets and potential capital losses.

“Risk comes in many forms but investors are acutely aware of two: the impact of capital losses and extreme bouts of volatility. Both can have a devastating impact on a portfolio.”

He says that capital losses, such as happened in 2008, may never be recouped by some older investors. Meanwhile, volatility can prompt investors to withdraw their money at just the wrong time or quickly erode a lifetime’s savings when an investor is drawing down their capital.

“The solution offered by the financial services industry typically involves well-intentioned advice to stay invested for the long-term and diversify your portfolio,” Armitage says. But, while such recommendations have merit, they also ignore several shortcomings of diversification.

“Diversification has been a central tenant of portfolio construction since the early-1950s when Harry Markowitz developed Modern Portfolio Theory. It tells us that investing is not just about picking the right asset classes. It’s also about selecting the right combination of asset classes.

“Most investors understand that by combining a range of asset classes with low correlations – spreading risk around – overall portfolio volatility can also be lowered.

“Unfortunately, the practical implementation of this concept leaves much to be desired. Investors have all too often found that when ‘growth’ assets decline, their entire portfolio slumps, and that the correlation between ‘growth’ and ‘defensive’ assets is often greater than they believe.

“This is because the investment returns of a range of asset classes are driven by many of the same factors. These can include: economic growth; valuation; inflation; liquidity; credit; political risk; momentum; manager skill; option premium; and demographic shifts.

“So, while investors have added a range of asset classes to their portfolio (such as property, infrastructure, distressed debt, and commodities) their portfolio risk remains similar at the expense of adding greater complexity and management cost.”

 

* Greg Bright is publisher of Investor Strategy News (Australia)

Print Friendly, PDF & Email
Twitter0
LinkedIn0
Google+0
Facebook1

Read More » Investment News

Recent articles

  • Salt diversifies with another AMP Capital hire April 14, 2021
  • FMA draws hard line under fund fees, softens on KiwiSaver advice costs April 14, 2021
  • Passive move activates AMP NZ investment role; double exit at AMP Capital… April 11, 2021
  • … as Ms Fixit comes to the rescue at AMP HQ April 11, 2021
  • Lifetime deadline set for late April April 11, 2021
  • MyFiduciary books first Australian consulting client April 11, 2021
  • Wealth Technologies welcomes aboard two new platform clients April 11, 2021
  • Look inside: why ESG is for managers not just investments April 11, 2021
  • Same time last year: why 2020 was tough for TAA despite record volatility April 11, 2021
Finished reading? Why not subscribe? To receive a weekly email enter your email address here.

Primary Sidebar

WEEKLY NEWSLETTER

Sign up here to receive our weekly newsletter.
Learn More »

Investment News

  • Salt diversifies with another AMP Capital hire April 14, 2021
  • FMA draws hard line under fund fees, softens on KiwiSaver advice costs April 14, 2021
  • Passive move activates AMP NZ investment role; double exit at AMP Capital… April 11, 2021
  • … as Ms Fixit comes to the rescue at AMP HQ April 11, 2021
  • Lifetime deadline set for late April April 11, 2021
  • MyFiduciary books first Australian consulting client April 11, 2021
  • Wealth Technologies welcomes aboard two new platform clients April 11, 2021
  • Look inside: why ESG is for managers not just investments April 11, 2021
  • Same time last year: why 2020 was tough for TAA despite record volatility April 11, 2021
  • Veteran exit triggers NZ Super management rejig April 11, 2021

Search by Keyword

Most Recent Investment News

Salt diversifies with another AMP Capital hire

April 14, 2021

FMA draws hard line under fund fees, softens on KiwiSaver advice costs

April 14, 2021

Passive move activates AMP NZ investment role; double exit at AMP Capital…

April 11, 2021

… as Ms Fixit comes to the rescue at AMP HQ

April 11, 2021

Lifetime deadline set for late April

April 11, 2021

Investment News Archive

Most Popular Articles

  • NZ share-trading splurge could trigger tax alarms… posted on October 5, 2020
  • Westpac NZ flags retail advice sale to Forsyth Barr posted on October 19, 2020
  • Flint set to spark platform competition posted on August 17, 2020
  • The horror year in technicolour: free KiwiSaver 13 report released posted on September 30, 2020
  • Four to the core: Smartshares to expand, rearrange and reprice ETFs posted on June 22, 2020
  • NZ Funds directors back on board posted on April 24, 2016
  • Kitset KiwiSaver scheme set to unwrap in spring posted on April 27, 2020
  • Kiwi Wealth hits the bigger time posted on November 26, 2017

Sponosored Content

Responsible goes retail: why Mint has opened the SRI tin

David-Boyle

Jumping lessons: what all investors can learn from GameStop loss

What do ‘Kiwi’ experts see for 2021?

David-Boyle

On the industry play-list: four chart-topping regulations for 2021

Quick-links to Popular News

  • FAP Compliance
  • Coronavirus
  • New Appointments
  • Financial Markets Authority (FMA)
  • Kiwisaver
  • Climate Change
  • Crypto Currency
  • Blockchain
  • Insurance

Secondary Sidebar

Recent News

  • Salt diversifies with another AMP Capital hire April 14, 2021
  • FMA draws hard line under fund fees, softens on KiwiSaver advice costs April 14, 2021
  • Passive move activates AMP NZ investment role; double exit at AMP Capital… April 11, 2021
  • … as Ms Fixit comes to the rescue at AMP HQ April 11, 2021
  • Lifetime deadline set for late April April 11, 2021
  • MyFiduciary books first Australian consulting client April 11, 2021
  • Wealth Technologies welcomes aboard two new platform clients April 11, 2021
  • Look inside: why ESG is for managers not just investments April 11, 2021
  • Same time last year: why 2020 was tough for TAA despite record volatility April 11, 2021
  • Veteran exit triggers NZ Super management rejig April 11, 2021

Footer

Copyright ©2020 InvestmentNews.co.nz — All Rights Reserved ·— Terms & Conditions