⏳ Reading Time: 3 minutesPortfolio diversification is one of the key tenets of the Moneyfarm investment process. In fairness, these days it’s not a terribly original idea, which doesn’t mean it’s not worthwhile. The idea is that you have a bunch of distinct assets that behave differently from each other and that helps even out some of the highs and lows you can get in financial markets.
But the outcome isn’t guaranteed and one reason for that is that the relationship between different instruments can change. Assets you thought behaved differently from each other last year start to move the same way this year.
We’ve been thinking about correlations (the extent to which different asset classes move together) recently in the context of the Artificial Intelligence (AI) theme. When we think about our equity exposure, the simplest way to implement it would be just to buy an ETF based on a broad index, say the FTSE All World or MSCI World. There are also a lot of ETFs available when we want to take a more targeted exposure.
Many of our B2C portfolios have exposure to Emerging Market equities, the Nasdaq – a tech-heavy US index, and a Global Value ETF. We’ve made those choices rather than simply buying a broad global index, so when we monitor them, we often think about whether they’ve done better than the broad index. Currently, given the focus on technology equities, we also think about how closely these instruments are aligned with the global tech sector. We want to understand how correlated these different instruments are.
