Investment: The art of finding true diversification

When investors speak of diversification, they usually do so from a risk point of view – the idea of not putting all your eggs in one basket, says Remi Olu-Pitan - multi-asset fund manager at UK multinational asset management company, Schroders.

She was one of the presenters at the company's recent annual investment symposium in Cape Town.

"Risk management is just one aspect of diversification. One should also look at the aspect of managing returns," explains Olu-Pitan.

"Diversification is also about ensuring that you are delivering on the outcome you set out to achieve. Not reaching that outcome is a risk in itself."

She says that is why multi-asset strategies have been designed and evolved over the past 10 years.

"A lot of South Africans have been investing in overseas equities, but the current question is whether these will continue to deliver the required returns," says Olu-Pitan.

"Over the last 10 years, equities have not always been the best asset classes."

Branching out 

That is why she proposes diversifying the sources of returns on investments.

"It is time to branch out and use diversification not just for risk management, but for returns management," she says.

"What if we are moving into a world that does not have perfectly defined phases of slowdown, recession, recovery, expansion? This means we need to move away from just relying on one asset."

Flexibility

She explains that, for multi-asset strategies to achieve their goals, they need to be flexible.

"Equities is a great asset class to deliver returns, but sometimes it won't deliver what you need. Look at a trade-off between risky and defensive assets," says Olu-Pitan.

"You will not always be compensated just for taking a risk. It is very important to think about what is risk, and what you should really be worried about."

For her it is about looking at the economic environments and how it will impact investment allocation.

"There is the risk of recession in the US next year and data from Europe is not good. We take action before scenarios occur, based on probabilities," says Olu-Pitan.

"The question now is whether central banks can really help, because growth has just not come through," she says.  "There is a gap between where financial markets and asset values are, and where the economy is at. That gap needs to close. Either the economy has to lift or equities will come down."

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