For investors already heavily exposed to US technology giants, global smaller companies may offer a useful source of diversification alongside attractive valuations.
Smaller companies can bring instant diversification to most portfolios, particularly for investors who already have a high degree of exposure to the mega-cap US technology stocks that now dominate all-cap market indices.
Harry Markowitz, the Nobel Prize-winning economist and father of modern portfolio theory, is credited with the idea that diversification offers the only “free lunch” in investing. Despite his endorsement, diversification appears to have slipped down the menu in recent years.
Global tracker funds regularly top the bestseller charts. In the words one of their leading providers, they aim to “minimise costs” and offer “a balanced and diversified mix of investments”. Certainly, their fees are low. But as for being balanced and diversified? That might be less true. While they are diversified by number of holdings, they have become increasingly concentrated by country, sector and company.
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