Active investors following the ancient way of diversification are hurting.
With just a handful of US stocks driving recent market returns on the back of artificial intelligence (AI) dreams, traditional risk management strategies have been a drag on performance.
But Greg Fleming, Salt Funds head of global diversified funds, says patient investors can stand the pain of relative underperformance for longer-term peace-of-mind.
In the latest Salt quarterly ‘Global outlook’, Fleming says: “Diversification is usually proven to be the correct method of portfolio management over time.”
Nonetheless, he says the “concentration of the global gainers has led to significant difficulties for active managers in the short-term”.
Buy-the-dip investors have kept the chip-based boom rolling amid a “heady mix” of “gaming, virtual reality, generative AI, robotics, digital currencies and data storage”, Fleming says.
However, he says any number of business, market and geopolitical risks could easily flip “investor psychology” from bull to bear – although such mood shifts remain notoriously difficult to time.
“… the importance of diversification should be remembered particularly in periods when diversification might appear to be diluting portfolio returns,” Fleming says. “This is because reversals in a dominant market narrative can unfold sharply, and it can be difficult to adjust positions efficiently at times of mass investor and trader exodus from a crowded trade.”
In a timely coincidence, share markets tipped sharply lower soon after Salt published its quarterly update with US indices posting their worst weekly losses since April.
The Auckland-based manager has adopted a “moderate reduction in portfolio risk from international equities for the second half of 2024, without implementing outright defensiveness just yet”, Fleming says.
“Our positioning has been adjusted accordingly, allowing portfolios to continue to benefit from international asset upside but with more of a proportional alignment toward the credit risk factors in corporate bonds than equities.”
Overall, he says Salt is focusing on “all-weather” securities in all asset classes that should prove “resilient to both diminishing growth and to profit challenges in a less stimulus-based, capital spending and productivity-led phase”.