• Many portfolios rely on the same underlying drivers, leaving investors less diversified than headline allocations might suggest.
  • Looking beyond traditional return drivers can help broaden portfolio diversification and reduce reliance on a handful of market outcomes.
  • Volatility and momentum strategies may help strengthen portfolio resilience across a wider range of market environments.

The diversification challenge

Diversification is one of the most familiar ideas in investing. In simple terms, it means not relying too heavily on one source of return. A portfolio can look well diversified on the surface, with exposure to many asset classes, regions and sectors, but still be driven by a small number of common forces underneath.

Most multi-asset portfolios are built mainly from equities and bonds. Equity exposure may be spread across thousands of companies, and bond exposure across governments and companies. That matters, but it does not always mean the portfolio is protected from the same big market drivers.

That is why we spend time looking beneath the headline asset allocation. The question is not only whether a portfolio owns lots of different investments, but whether those investments behave differently when markets are under pressure.

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