Key takeaways:
- Diversification is a foundational part of investing, used to lower risk and stabilise returns.
- A global fund of funds like CT Global Managed Portfolio Trust has exposure to companies worldwide, making it well diversified.
- A diversified global fund of funds aims to hold assets with low correlation to each other, reducing overall risk.
What is a fund of funds?
As a fund of funds, CT Global Managed Portfolio Trust is well diversified. That means it’s a fund comprised of other funds (or investment companies) that we have carefully curated. As the trust has a global mandate, these funds have exposure to companies worldwide. Global exposure means no one’s eggs are in just one basket.
We rarely decide to put all our eggs in one basket: it’s a well-known phrase for a reason. Committing to just one idea strikes us as a bit risky. What if it doesn’t work out? So instead, we put our eggs in different baskets, some over here and some over there. That way, if one idea fails, at least another might succeed. Risk is lowered as the probabilities balance each other out.
Investing works in just the same way. By using a few different asset classes, regions, and sectors, risk is reduced. If one region or sector is struggling, another might be excelling. This balance lessens overall risk in the portfolio. The result is that performance isn’t dragged down too much by one underperforming sector. Performance itself tends to be more stable.
Building a portfolio containing different assets, regions or sectors is described as diversification. It’s a foundational part of investing. We use diversification to lower risk and stabilise returns. You probably wouldn’t put all your eggs in one basket, and neither would we.
Why is diversification important?
A fund of funds like CT Global Managed Portfolio Trust gives you access to a range of funds. These underlying funds offer exposure to different regions, sectors, time frames, and asset classes (like bonds and equities), all of which increase diversification. This is crucial as a diversified range of underlying holdings don’t tend to all move in the same direction, at the same time.
For example, a fund may hold some long-term investments like long-dated bonds, alongside assets which tend to be more liquid and shorter-term, like cash and short-dated bonds. Or a fund may hold regions which don’t necessarily move together, or sectors which go up and down at different times. This is described as correlation; how highly correlated two assets are indicates how closely they move together. Two perfectly correlated assets would move perfectly together.
In investing, it’s impossible to avoid some correlation – inevitably, there will be times when some assets tend to move in similar directions – but levels of correlation tend to be lower in a diversified global fund of funds. Diversification aims to include holdings that are not highly correlated with one another.
Why bother? Well, broad diversification aims to deliver attractive returns at a lower risk than investing in fewer assets. With plenty of different exposure, risk is widely spread. It also leads to more consistent returns as the portfolio isn’t dragged up or down by one particular trend.
Although it’s important to note that diversification cannot completely protect against loss. Systemic risk, otherwise known as market risk, is hard to protect against totally. This type of risk is inherent to the whole market and difficult to avoid as there may be times when all regions and sectors fall together. But diversification does help and remains crucial to achieving long-term financial goals while minimising risk.
Diversification at CT Global Managed Portfolio Trust
CT Global Managed Portfolio Trust is managed by fund manager, Peter Hewitt, and his team. Peter has been a fund manager since the 1980s and has decades of experience building diversified global portfolios. He has constructed a fund comprised of about 40 underlying investment companies, all of which have different components and exposures.
These underlying sector exposures currently include private equity, renewable energy, global emerging markets, and biotech and healthcare, and many more. These areas are all affected by different unsystemic risks, otherwise known as industry-specific risks; the healthcare industry faces different risks to renewable energy. That means if an industry-specific change in operations hugely impacts one sector, hopefully, the other isn’t affected. Returns are smoothed and risk is lowered.
A global mandate also means our investment research team never sits still. We constantly scan the globe for the best options, and there are always new opportunities to find. A fully diversified portfolio requires constant research and analysis to ensure holdings are balanced and not completely correlated with one another. The market keeps moving, and so does our research. The aim is to build a global portfolio which drives robust long-term returns without high levels of investment risk. That’s what diversification is all about.
Investment Risks
The value of your investments and any income from them can go down as well as up and you may not get back the original amount invested. Gearing is used for investment purposes to obtain, increase or reduce exposure to an asset, index or investment. The use of gearing can enhance returns to investors in a rising market, but if the market falls the losses may be greater.
