Why diversification has never been more important to investors
Following a broadly torrid first half year for stock markets – the worst in the US for 50 years - economists and analysts have been wondering where next for the global economy. It seems geopolitical and macroeconomic risks are in abundance.
Concerning them most are supply chain logjams and Russian aggression in Ukraine, which are stoking the highest inflation economies have experienced in 40 years. In an attempt to put the genie back in the bottle, central banks around the world are rapidly raising interest rates and embarking on monetary tightening. But this sharply hawkish turnaround in monetary policy has potentially nasty side-effects: it may slam the brakes on global economies and tip them into recessions.
As a result, even economists are having a tough time creating macroeconomic forecasts and deciding which assets or markets represent the best opportunities for investors. 2022 thus far has seen vastly diverging fortunes: the worst bond market performance since the 1980s, the largest commodity gains since the 1960s, and blistering falls in growth company valuations after more than a decade of almost being the only game in town. Few would have predicted these extremes a year ago.
During times of turmoil
Such polarisation in the markets makes it extremely tough for private investors to construct effective portfolios that tap into the best opportunities across assets, markets, and geographies, yet circumvent areas facing the most risks.
If we look to just investment trusts, the choice is vast: bonds, stocks or alternatives for example; or regions, countries, investing styles, or industry themes; or even highly niche areas of the market such as wind farms, retail distribution hubs, forests, and even music royalties.
Given the tough prevailing market conditions, multi-manager investment trusts such as Alliance Trust remove the need to make allocation calls across equity markets – offering investors an extra layer of active management and diversification. By leaving the investment trust to allocate to various Stock Pickers who then invest around the world, it hands over the job of finding best-in-class investment managers to the team at WTW, Alliance Trust’s manager, who have the knowledge and resources to steer their investors’ wealth through uncertain markets and uncertain times.
As Alliance Trust Stock Picker Simon Denison-Smith, Metropolis Capital, recently remarked: “Diversification is one of those things that’s often described as a free lunch, and it’s [one] we should all be taking up the opportunity to digest.”
The views expressed are the opinion of the Managers and are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell any securities. The views expressed were current as at June 2022 and are subject to change. Past performance is not indicative of future results. A company’s fundamentals or earnings growth is no guarantee that its share price will increase. You should not assume that any investment is or will be profitable. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. TWIM is the appointed Alternative Investment Fund Manager of Alliance Trust plc. Alliance Trust plc is a listed UK investment trust and is not authorised and regulated by the Financial Conduct Authority.
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