Probably the most well-known piece of investment jargon: “don’t put all your eggs in one basket” is advice to prevent the trauma of all your eggs breaking from the action of one dropped basket. The solution, of course, is generally held to be diversification.
DIVERSIFICATION: One of the kings of diversifiers was Harry Markowitz whose “efficient portfolio” and contribution to Modern Portfolio thinking started off as a mathematical tale which became embedded in investment speak. For Markowitz there was one easy way to make more money than everyone else: put 100% of you money into the asset which goes up more than everything else. Easy. The problem is- how do we know which asset is going to go up more than everything else?
From that we end up with Markowitz leading us into diversification, and the acceptance that, in a modern diversified portfolio, some bits will actually fail every year and some will not. So if our original risk profile is (say) 10% bonds, and if, on review, that part of the portfolio is down say 10%, then in theory we should be buying more bonds (ideally from whatever went up) in order to get back to our original risk profile. So much for theory.
Nevertheless, in periods of “normal” markets the Mondial Investment philosophy leans heavily on multi-asset managers simply because they are saturated in Markowitz born theory. They review the range of assets and make risk assessments based on strategic medium term research. Expecting that, over rolling periods of time, their balance between the asset classes will outperform the rate of inflation in the base currency they target.
Over rolling periods of time our Multi-asset managers have diversified- and have achieved what it says on the tin: real growth.
DIWORSIFICATION: Then again- sometimes the eggs can be balanced awkwardly. The phrase comes from Peter Lynch’s book “One up on wall street”. The main area for “bad diversification” include: having too many assets in your portfolio. Owning too many funds, too many assets,can actually increase your transaction costs and your management costs such as the need for due diligence and understanding all of the choices.
In times of utmost stress the real need for diversification seems to disappear altogether. The Mondial “stock” position is always based on markets “reverting to mean” and recovering over time. Hence the stock answer : “stay calm, stay invested”. Even if the world tips into recession- we would expect markets to return via a V-shape recovery (as recession is almost certainly priced in), or maybe if COVID is a longer term- a U-shape recovery.
WHEN DO THE EGGS NEED A DIFFFERENT BASKET? An L-shaped recovery- i.e. a DEPRESSION is a different thing altogether. The last American one in 1929 lasted ten years. OK- they don’t happen that often but they make a mockery of stock answers. We therefore gradually shift our more cautious investors towards quasi-cash assets, structured notes and coupons offering more exciting returns than a corporate world stifled.
For now- we carry our eggs with care- with a steady hand on the types of baskets we carry.