Partner Insight: A portfolio invested in equities, high yield corporate bonds, convertible debt and real estate may appear on the surface to be diversified, with each asset sounding very different from the other. The reality however is very different.
This is because these securities may have different labels but they exhibit similar relationships to the economic cycle and so are susceptible to delivering negative performance at the same time, rather than providing the offsetting returns one would hope for from true diversification.
But by looking beyond traditional equity/bond labels, it is possible to build a suitably diversified portfolio from the bottom-up according to Investec Diversified Income fund manager John Stopford.
Portfolio managers Stopford and Jason Borbora aim to achieve defensive returns by actively diversifying the portfolio from the bottom-up. To help achieve this, they divide assets into three groups: Growth, Defensive, and Uncorrelated, separated according to how their returns are impacted by the economic cycle.
According to the team, for the majority of an economic cycle (c.70% by time) Growth assets will provide positive excess returns, compensating investors for the uncertainty of owning assets reliant on economic growth for their returns. According to the managers, this means that investors, on average, should weight their portfolio risk more towards Growth assets while also maintaining at all times a blend of Defensive and Uncorrelated assets. As the cycle mature, the weighting to Defensive and Uncorrelated assets should increase, recognising that the economic growth engine may start to fail.
This investment approach is just one part of the Investec Diversified Income fund's non-traditional approach to diversification that aims to deliver a defensive' return alongside some capital growth to investors in even the most uncertain of economic environments. They aim to achieve this alongside 'bond-like' volatility.
Over the past five years, the fund has been able to reduce risk and produce a less concentrated income stream, while maintaining its target yield requirement by using this strategy.
Click here to read more about Investec Divesrfied Income's approach to diversification, and how the team has delivered an income of between 4%-6% per annum since launch.