The thinking behind these moves also inspired a sensible question at our seminar held this week on the subject of diversification – how should readers position their portfolios to similarly protect their wealth from the possibility of a statist Corbyn government? Yet the question also highlights one of the inherent difficulties in building a well-diversified portfolio – that tactical diversification against specific events with binary outcomes is difficult to do, and could be rather dangerous if the outcome we position for does not come to pass. Good diversification is about the long term more than the short, and should always be in place to protect against the many, sometimes unexpected risks that could come along and rock the investment world – across asset classes, geographies and, increasingly, the big investment themes that are disrupting business today.
That last point is made in one of the hedge fund letters that James Norrington looks at on pages 32-33, and which he highlighted in his presentation at our event. I was particularly struck by the idea that when determining our portfolio exposures, we should perhaps consider the somewhat radical idea of ripping up the theory of old, and consider an entirely new way of diversifying – in short, aligning our investments with the way the world works and is changing rather than with somewhat esoteric ratios of shares to bonds that we determine according to arbitrary risk profiles and an array of risks we can’t accurately quantify. Themes like resource scarcity, decarbonisation, longevity, artificial intelligence and robotics, and the growth pivot to Asia offer disruptive threat and opportunity in equal measure and should surely sit at the heart of all investors’ long-term thinking.
The problem is that unlike established portfolio theory there are as yet no clear rules as to how to implement thematic diversification. It’s a problem we will be exploring in the months ahead, and maybe the trick is to combine the traditional approach to diversification with a thematic overlay – sticking with tried-and-tested asset allocation models but making sure the assets we buy reflect the changing world. Whatever we conclude, there is no shortage of ways to buy into these world-shaping trends, whether through forward-thinking trusts such as Scottish Mortgage, exciting companies such as Alphabet or Alibaba, or via the proliferation of thematic ETFs. Investors – and capitalism in general – seem to have a lot of enemies at the moment. Trends could offer some much-needed friendship.
