Succeed by managing risk through diversification—protecting investors from the downside while cultivating room to grow.
Once we have a portfolio’s broad asset mix defined, we expand the investment universe to manage risk and maximize value. The more asset classes we have to work with, the more opportunity there is to create a portfolio with higher return and/or lower risk potential.
One way we accomplish this is breaking down the fixed-income and equities categories into smaller components. For example, consider US stocks. They make up a significant portion of all global equities—but we don’t blindly replicate that portion in the equities component of every portfolio. Instead, we increase or decrease the weight the portfolio gives to this asset subclass depending on our long-term capital market expectations.
Likewise, government bonds are a significant component of global bonds, but may not look as attractive as equities or even other bonds on the basis of yield. Separating government bonds from corporate and other bonds gives us the opportunity to decrease a portfolio’s allocation of government bonds, if we believe there is value in doing so.
Another way we diversify our asset classes is by going beyond traditional stocks and bonds and including assets like mortgages, which have historically offered excellent risk-adjusted returns, but are not represented in most fixed-income asset portfolios.
By mixing these assets strategically and efficiently, we aim to provide the highest return possible for a given level of risk over the long term.